Chuck E. Cheese, Hertz Hertz, and JC Penney are three very different businesses, yet they share one feature in common: strangely scheduled executive bonuses prior to when the company filed bankruptcy.
Every business gave its highest-ranking executives a pay raise this year prior to filing Chapter 11 bankruptcy. Neiman Marcus too, and the oil companies. Whiting Oil and Chesapeake Energy. There were 42 companies paid out millions of dollars in”retention” or “retention” bonus payments in the days preceding their bankruptcy The Government Accountability Office, or GAO discovered in a recent report.
“These firms paid bonuses totaling $165 million over just five and two days prior to when they filed bankruptcy.” stated Michael Clements, GAO’s chief financial officer, on an interview on a GAO podcast that discussed the report. .
The giving of retention incentives by dozens of businesses in advance of Chapter 11 filings shows the U.S. Bankruptcy Headquarters’ code needs to be changed according to experts from CBS MoneyWatch. This could mean altering a rule of the bankruptcy code which Congress adopted around 15 years ago according to them.
in 2005 Congress adopted legislation known as the Bankruptcy Abuse Prevention and Consumer Protection Act that severely limited the capacity of companies that are in bankruptcy to offer retention incentives to employees and executives without the approval of the bankruptcy judge. The bankruptcy rules don’t regulate the actions a business can take prior to filing bankruptcy, according to Gregory Germain, bankruptcy expert and law professor in the law department at Syracuse University.
Of the 7300 firms who filed for bankruptcy this year there was no request for the approval of a judge for incentive bonuses for retention, GAO found. Instead, many offered the incentives in the beginning.
Congress can solve this issue by enacting a new policy, Germain said.
“If they are looking to stop the management award system from making the company bankrupt it is essential to take action prior to and after the bankruptcy process,” He said. “Otherwise what you’re doing is provide incentives to pay for compensation prior to bankruptcy.”
The GAO interviewed bankruptcy lawyers in its 34-page reportthat was published this week. Lawyers in the report said the bankruptcy statute was “less than efficient” due to companies finding ways around it. The idea of giving bonuses to retainers is not a good idea, they stated since it significantly reduces the amount that a company can pay its debt.
A rationale for financial stability
The review of retention rates is due at a time when US firms are filing for bankruptcy at an record-breaking rate. In the year 2020, in the midst of the pandemic, 630 businesses filed for bankruptcy – the largest amount since 2010, as per S&P Global. Businesses are still declaring bankruptcy this year however data from midway through 2021 suggests that levels won’t increase as dramatically as in the previous year.
The decline in sales for 2020, due to the Coronavirus pandemics, has forced some of the nation’s biggest retailers to declare bankruptcy. As stores closed, and employees were cut off or laid off executives received huge bonus payments.
Hertz CEO Paul Stone received $ 700,000, Chuck E. Cheese CEO David McKillips got $ 1.3 million, and JC Penney CEO Jill Soltau received $ 4.5 Million, just to mention just a few.
“Not required in any way”
Businesses are giving incentives to keep employees in the company to ensure they have the best possible system to deal with bankruptcy recovery, according to Jared Ellias, an expert in corporate bankruptcy law , and professor of the University of California, Hastings. In certain cases, businesses worry about losing top executives due to the fact that “it may take anywhere from between six and a year to find a new employee,” Ellias said.
In the context of regulatory proceedings, companies frequently argue that retention incentives give executives a reason and other employees who are key to stay on and resolve what is going on with the business.
“It’s to excuse something,” claimed Germain. “ They claim that the CEO is aware of the issues and the best way to address the issues, but whether or the claim is the case, nobody is sure. In the majority of cases it is not even required. In some cases, executives profit from the fact that their company is in serious danger. “
Chuck E. Cheese defended the bonuses he offered McKillips along with 29 other employees, stating in an email to CBS MoneyWatch that the company “has made steps to ensure the business’s continuity.”
“These measures were put in place in order to make sure that the company has management skills and commitment to position the business in this ever-changing environment in order to meet the demands of our employees, customers and our business partner. “the company explained.
Hertz has not responded to requests for information.
JC Penney declined to comment however, the company stated in a regulatory filing filed last year that the reward was intended to “retain and keep motivating its executives as well as other employees within the volatile and uncertain conditions that are affecting this industry.”
Christophe J. Brooks
Christophe J. Brooks is an editor and reporter of CBS MoneyWatch and covers business and consumer issues, as well as financial matters that cover everything from economic inequality and housing issues to bankruptcy and sports-related issues. Brooks has reported on economic and business developments with newspapers such as the Rochester Democrat and Chronicle and the Bristol Herald Courier. He also has written about college and higher education in the Omaha World-Herald, the Florida Times-Union as well as The Ledger in Lakeland, Florida.