Bankrupt companies gave $ 165 million in bonuses to top executives before going bankrupt last year

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Chuck E. Cheese, Hertz, and JC Penney are three very different companies but share one thing in common: oddly timed executive bonuses before they file bankruptcy online.

Every company gave its top executives a pay bonus last year just before declaring Chapter 11 bankruptcy. Neiman Marcus too, and the oil companies. Whiting Oil and Chesapeake Energy. A total of 42 companies awarded millions of dollars in so-called “retention” bonuses in the days leading up to their bankruptcy, the Government Accountability Office, or GAO, found in a new report.

“These companies paid bonuses totaling $ 165 million between five months and two days before the company filed for bankruptcy,” said Michael Clements, GAO’s chief financial officer, in a GAO podcast discussing the report. .

The granting of retention bonuses by dozens of companies ahead of Chapter 11 filings shows the U.S. bankruptcy code needs to be fixed, experts told CBS MoneyWatch. The change may involve changing a rule in the bankruptcy code that Congress passed about 15 years ago, they said.

 

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In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which severely limited the ability of debtor companies to grant retention bonuses to executives and workers without the blessing of a bankruptcy judge. Bankruptcy rules, however, do not regulate what a company can do before filing for bankruptcy, said Gregory Germain, bankruptcy expert and professor of law at Syracuse University.

Of 7,300 companies that filed for bankruptcy last year, none sought a judge’s approval for retention bonuses, GAO found. Instead, many gave the bonuses up front.

Congress can fix this problem by passing a new rule, Germain said.

“If they want to stop the management award process for leading the company to bankruptcy, they really have to do it before and after bankruptcy,” he said. “Otherwise, all you do is create an incentive to pay compensation before bankruptcy.”

The GAO interviewed bankruptcy lawyers as part of its 34-page report, which was released last week. In it, lawyers said the bankruptcy abuse law was “less than effective” because companies found a way around it. Granting retention bonuses overall is problematic, they said, because it effectively reduces the amount of money a business could pay for its debt.

An excuse for financial stability

The check on retention premiums comes as US companies file for bankruptcy at a historically high rate. In 2020, amid the pandemic, 630 companies declared bankruptcy – the highest number since 2010, according to S&P Global. Companies are still filing for bankruptcy this year, but data midway through 2021 suggests levels will not be as high as last year.

Fall in sales in 2020, caused by Coronavirus pandemic, has led some of the country‘s largest retailers to file for bankruptcy. But as stores closed and employees were laid off or laid off, some CEOs received big bonuses.

Hertz CEO Paul Stone received $ 700,000, Chuck E. Cheese CEO David McKillips received $ 1.3 million and JC Penney CEO Jill Soltau Received $ 4.5 Million – Just to name a few.

“Not necessary at all”

Companies are giving these retention bonuses because they want the best possible framework to handle bankruptcy recovery, said Jared Ellias, an expert in corporate bankruptcy law and a professor at the University of California, Hastings. In some cases, companies fear losing senior executives because “it can take six months to a year to hire someone new,” Ellias said.

In regulatory cases, companies often argue that retention bonuses provide an incentive for executives and other key employees to stay and fix what is plaguing the business.

 

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“It’s an excuse,” said Germain. ” They say [the CEO] knows where the problems are and how to fix them, but whether or not that is true, no one knows. In most of the cases, [the bonus] is not necessary at all. To some extent, executives are taking advantage of a business that is already in serious trouble. ”

Chuck E. Cheese defended the bonuses he gave McKillips and 29 other employees, saying in a statement to CBS MoneyWatch that the company “has taken steps to preserve the continuity of its business.”

“These actions have been put in place to ensure that we have the management expertise and dedication to best position the company, in this unprecedented environment, to meet the needs of our customers, employees and business partners. “the company said.

Hertz did not respond to requests for comment.

JC Penney declined to comment but the company noted in a regulatory filing last year, that the bonus was designed to “retain and continue to motivate its NEOs and other employees in the volatile and uncertain environment affecting the retail industry” .

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