Executives Cashing In as Companies March Toward Bankruptcy

Neiman Marcus is the latest company to draw howls over its generous performance- and retention-based compensation package for a group of executives at a time when the company itself is fighting for survival.

Executive bonuses offered after a business files for bankruptcy can be aired out and debated thanks to laws created following the collapse of Enron, which shined a light on excessive compensation practices of companies navigating through bankruptcy.

But some companies still find a way to fudge their way around the reforms by making performance-based compensation too easy to achieve or liberally handing out retention pay. Still, others circumvent the law by making payments immediately 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. Chesapeake 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,” said executive employment lawyer Joe Ahmad of Houston-based Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing, or AZA. “If business leaders are rewarded for performance even when a company is going down the tubes, it creates the impression of heads I win, tails you lose for the rest of us.

“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. 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.” 

To speak with Joe Ahmad, contact Robert Tharp at 800-559-4534 or robert@androvett.com.


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