American Firms Shower Executives with Big Bonuses Ahead of Bankruptcy Filing

Whiting Petroleum Corp bestowed $14.6 million in extra compensation to executives days before its April 1 bankruptcy.

Shale pioneer Chesapeake Energy Corp awarded $25 million to executives and lower-level employees in May, about eight weeks before filing bankruptcy.

Both cited fallout from the pandemic and a Saudi-Russian oil price war, which they said rendered their incentive plans ineffective.

Reuters reviewed financial disclosures and court records from 45 companies that filed for bankruptcy between March 11, the day the World Health Organization declared Covid-19 a pandemic, and July 15.

Using a database provided by BankruptcyData, a division of New Generation Research Inc, Reuters reviewed companies with publicly traded stock or debt and more than $50 million in liabilities.

Such bonuses have long spurred objections that companies are enriching executives while cutting jobs, stiffing creditors and wiping out stock investors.

In March, creditors sued former Toys 'R' Us executives and directors, accusing them of misdeeds that included paying management bonuses days before its 2017 bankruptcy.

The retailer liquidated in 2018, terminating more than 31,000 people.

A lawyer for the executives and directors said the bonuses were justified, given the extra work and stress on management, and that Toys 'R' Us had hoped to remain in business after restructuring.

In June, congressional Democrats responded to the pandemic-induced wave of bankruptcies by introducing legislation that would strengthen creditors’ rights to claw back bonuses.

The bill — the latest iteration of a proposal that has long failed to gain traction — faces slim prospects in a Republican-controlled Senate, a Democratic aide said.

Firms paying pre-bankruptcy bonuses know they would face scrutiny in court on compensation proposed after their filings, said Clifford J. White III, director of the U.S. Trustee Program, a Justice Department division charged with monitoring bankruptcy proceedings.

But the trustees have no power to halt bonuses paid even days before a company’s bankruptcy filing, he said, allowing firms to “escape the transparency and court review.”

Dodging bonus restrictions

The 2005 legislation required executives and other corporate insiders to have a competing job offer in hand before receiving retention bonuses during bankruptcy, among other restrictions.

That forced failing firms to devise new ways to pay the bonuses, according to some restructuring experts.

After the 2008 financial crisis, companies often proposed bonuses in bankruptcy court, casting them as incentive plans with goals executives must meet.

Judges mostly approved the plans, ruling that the performance benchmarks put the compensation beyond the purview of the restrictions on retention bonuses.

The plans, however, sparked objections from Justice Department monitors who called them retention bonuses in disguise, often with easy milestones.

Eventually, companies found they could avoid scrutiny altogether by approving bonuses before bankruptcy filings.

Dozens of companies have approved such payouts in the last five years, said Brian Cumberland, an executive compensation expert at consulting firm Alvarez & Marsal who advises companies undergoing financial restructuring.

Companies argue the bonuses are crucial to retaining executives whose departures could torpedo their businesses, ultimately leaving less money for creditors and employees.