Executives Cash in as Companies March Toward Bankruptcy 

Neiman Marcus is the latest company to raise eyebrows with a generous performance- and retention-based compensation plan for a group of executives at a time when the company itself is fighting for survival. 


In July, investors, furloughed employees and bankruptcy trustee Henry Hobbs howled at the prospect of a $10 million compensation package for the high-end retailer’s CEO and a group of executives while stores are shuttered and the company’s future is uncertainHobbs argued that the proposed performance goals should represent “challenging incentive-based benchmarks,” while retention pay should be reserved only for employees that have documented job offers in hand. 


There’s an opportunity for debate when these packages are filed during bankruptcy proceedings, which is more than can be said for many other companies that are choosing instead to fudge their way around post-Enron era reforms meant to provide more transparency in executive compensation. 


The collapse of Enron shined a light on questionable executive compensation practices. In its wake, laws were changed to provide for court scrutiny of bonuses awarded during bankruptcy and limit a business’s ability to rubber stamp executive compensation. So-called retention pay  which is sometimes quite necessary to keep key employees during difficult times – now requires that companies show evidence that an employee has a bona fide job offer in hand before receiving retention pay 


But of course, the law has loopholes that allow some to game the system. First, companies may claim the compensation is being rewarded for performance rather than for retention while setting performance goals that are easy to achieve. This effectively takes an end run around the requirement of showing another job offer.   


Some companies avoid court accountability altogether by making these payments before filing bankruptcy. The recent hall of shame in this area includes Whiting Petroleum, which awarded $14.6 million in cash bonuses to its executives days before filing for bankruptcy. The board claimed that cash bonuses were appropriate because the fall in the price of oil following the pandemic shutdown made it “virtually impossible” to meet pre-pandemic performance goalsChesapeake Energy and Hertz also paid such bonuses to execs before entering bankruptcy court.  


The problem with performance pay is that it’s only fair if it cuts both ways. Executives are happy to reap enormous windfalls via stock-based compensation when a company’s stock is doing well – even if their leadership played no role in the stock’s rise. But when companies are teetering toward bankruptcy, executives see their equity-based compensation rendered worthless. If executives are rewarded for performance even when a company is going down the tubes, it creates a headsIwin, tailsyoulose impression for the rest of us. Parties sometimes sue in an attempt to claw back the executive pay, but that’s rarely a satisfactory remedy. By effectively asking for forgiveness rather than permission, there’s few repercussions for a company beyond the negative hit in the court of public opinion. 

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