September 17, 2020

FEI Daily – The Push and Pull of Executive Bonuses and Bankruptcy

by Dayna Harris

Nothing makes media headlines faster than jaw-dropping executive incentive payouts and/or retention bonuses paid prior to a company’s bankruptcy filing. Within this context, the impact of COVID-19 has been uneven across sectors and has contributed to poor performance across various industries. Some sectors, like retail, were already challenged; J.C. Penney, Neiman Marcus, J. Crew and more teetered on the edge of solvency. With almost six months of the pandemic behind us, other casualties include airlines, hotels, car rentals, movie theatres, theme parks, and any other business that brings people together in crowds. Many companies are in survival mode. Some will live. Some will die. But prior to filing for bankruptcy, and as companies prepare to emerge from bankruptcy, there is an important consideration: the ultimate restoration of shareholder value. The retention of key executives is of paramount importance during this extraordinary period. But the real question is, what types of bonuses make sense prior to a bankruptcy filing, and how should companies manage the optics with stakeholders?

A recent Reuters analysis of securities filings and court records identified 32 of 45 companies that paid out bonuses in the six-months prior to filing for bankruptcy, with nearly half making the payouts within two months. Several companies made large bonus payments, often while furloughing or laying off employees, before their bankruptcy filings.

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