Companies across the US are awarding top executives multimillion-dollar "retention" bonuses shortly before declaring bankruptcy, angering creditors who claim the payments are rewards for failure.
The practice has become commonplace among distressed companies pushed over the edge by the coronavirus pandemic. The list includes high-profile collapses such as JC Penney, Hertz and Neiman Marcus; companies squeezed by the energy downturn such as Whiting Petroleum; and smaller groups where revenues have been hit by the health crisis, such as century-old lawnmower engine maker Briggs & Stratton.
In most cases, the payments are tied to senior managers remaining in their roles while the company goes through a reorganisation. Supporters of the practice say it limits disruption for groups already facing a tumultuous future, and argue that retaining top talent is critical to a successful turnround.
But creditors have struck back, particularly at companies that have rewarded managers who presided over slumps in their businesses. Often, retention payments are granted weeks — or even days — before groups lay off workers and refuse to pay interest to lenders.
"If management ran the company into the ground then someone else should be able to do at least as well as them," said Tom Krasner, founder of Concise Capital, a Miami-based fund manager. "I don't think these retention payments are in any way warranted."
Brad Holly, Whiting's chief executive who joined the company in November 2017, received US$6.4 million ($9.7m) at the end of March under a new compensation plan approved by the board of directors, which he also chairs, less than a week before the company filed for bankruptcy. Whiting, which expects to emerge from Chapter 11 next month, said last week that Holly would step down as chief executive when that happens and would receive an additional US$2.53m in severance.
In total, Whiting paid out more than US$14m to executives just a few days before declaring itself bust. In a regulatory filing on April 1 the company said its pay plan was designed "to align the interests of the Company and its employees". Whiting did not respond to a request for comment.
In court filings at the end of last month, BNN Western, an energy company owed money by Whiting, objected to the company's reorganisation plan. "Ultimately, these payments could be avoided and clawed back for the benefit of creditors in order to maximise recovery," BNN said.
Retention awards in the run-up to bankruptcy have become more prevalent in recent years, following a 2005 law that restricted the payment of bonuses when a company is actually in bankruptcy proceedings. Critics of pre-filing awards say they flout the spirit of that law, which was intended to curb payouts to executives when a company is in distress.
"It's regulatory evasion. I don't like regulatory evasion," said Jared Ellias, a law professor at the University of California Hastings College of the Law. "It goes to a governance system that is really broken."
Briggs & Stratton's board approved more than US$5m in retention payments on June 11, including more than US$1m to chief executive Todd Teske, who has led the company for a decade. Four days later the company failed to make a US$6.7m interest payment on a bond due later this year, and on July 20 it filed for bankruptcy. On July 19, the company's board voted to terminate the health and life insurance benefits of the company's retirees.
Briggs & Stratton declined to comment.
The company's 2020 bond is now trading at just a few cents on the dollar, reflecting slim hopes of recovery. Brown Rudnick lawyer Robert Stark, who is representing unsecured creditors in the Briggs & Stratton bankruptcy case, said the retention payments were egregious.
"This is where we are," he said. "Management has control. They pay themselves large bonuses, stick it to the rank and file and don't pay their bondholders."
Analysts say more cases such as Whiting and Briggs & Stratton could be in the offing, as companies struggle to overcome the economic effects of the pandemic.
S&P Global noted that 424 companies with rated debt outstanding had filed for bankruptcy over the year to August 9 — the fastest pace for filings in a decade.
CBL & Associates, one of the largest mall operators in America, said on Wednesday that it expected to file for bankruptcy. The day before, it approved more than US$2m in bonuses for top executives, including a US$953,000 retention payment for CEO Stephen Lebovitz.
"There is so much pain in the economy; there are so many people out of work," said Ellias. "It's saddening that there isn't some restraint by those who control big piles of money from doing things that make themselves look stupid."
Written by: Joe Rennison and James Fontanella-Khan
© Financial Times