Before the bankruptcies came the bonuses: $10 million at J.C. Penney Co., $25 million at Chesapeake Energy Corp., $1.5 million at Hertz Global Holdings Inc.
That’s how much was promised to executives only weeks or in some cases days before bankruptcy. Of the 100 or so major companies that have filed since the coronavirus shutdown began, 19 of them have committed to paying a total of $131 million in retention and performance bonuses, both before and after filing, a number that’s poised to climb as a record number of Americans are jobless and the pandemic spreads.
The companies say they need to keep their management teams to help turnaround consultants repair the damage, even when it means rewarding people who were in charge when the business began sinking. The timing of some of the bonuses, before the filing, legally heads off opposition from creditors, who can’t block such payouts unless they’re made after a case reaches court.
The practice isn’t new, but the context is unprecedented. The economy is in a tailspin, and while thousands more Americans stand to lose their jobs in J.C. Penney’s bankruptcy, the $4.5 million going to Chief Executive Officer Jill Soltau, who in fairness took over in 2018, when the company was already decades in decline, is pretty much a done deal, as are other payouts.
“We really find them offensive in light of the median worker pay, the reductions in benefits and layoffs due to store closings,” said Julie Farb, director of the Center for Strategic Research at AFL-CIO, a federation of 55 labor unions. “It’s all made worse in the current Covid environment.”
According to the law, company creditors and the U.S. Trustee, which oversees bankruptcies for the Justice Department, can dispute bonuses paid to executives while in bankruptcy, but not payments made before filing.
To challenge pre-bankruptcy bonuses, creditors need to file an adversary claim, such as a fraudulent-transfer claim, which can be costly and time-consuming.
In recent weeks, the U.S. Trustee has objected to about a dozen bonuses it says were excessive, said Peter Carr, a spokesperson for the agency. The Trustee has generally been unsuccessful in blocking payouts, he said.
“The only remedy is a claw-back,” Carr said. “The U.S. Trustee program can’t seek that remedy, so we object to any debtor motions that would prevent the unsecured creditors’ committee from pursuing this remedy.”