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On eve of bankruptcy, US firms shower executives with bonuses

298 points by humanlion87 6y ago

amiga_500 6y ago
The execs getting the bonus know that other USA execs won't frown on this. The execs getting the bonus know regulators won't come after them. The execs getting the bonus know the media won't name and shame them. The execs getting the bonus know that nobody in their social circle will shun them. The execs getting the bonus don't even think this is wrong, as the main aim is to grab what you can when you can, and if it's immoral, well someone should change the rules. Yes laws need changing, but laws are set by culture, ultimately. This is a deep, deep cultural problem that is killing the USA, and I've yet to see it acknowledged anywhere in the mainstream.
- inerte 6y ago
  Depends what you mean by mainstream, or acknowledged. That's one of main talking points of Bernie Sanders, which was almost there as the Democrat candidate. I feel like everybody had the chance to see it, so it was mainstream. Acknowledged in the sense that we recognize this an as actual, structural and cultural problem? Yeah, not happened. Not in this country, where "the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires". I at least hope people understood being rich and running a business doesn't automatically translate to being good at public office.
  - hedora 6y ago
    Wasn’t Trump’s other campaign slogan “Drain the swamp?”
- kaiju0 6y ago
  It's completely rational. The company is going into bankruptcy. The money can be mine or someone else's. If you had a chance to get $1,000,000 or the bank takes it with no consequences what do you do?
  - triceratops 6y ago
    The money is already someone else's, by law: the creditors'. Rational != ethical, which is what the GP is arguing. There are many things that are entirely rational to do that we nevertheless don't do. Either due to societal mores or laws, or both.
  - amiga_500 6y ago
    And that is exhibit A. Ingrained into the culture. Rational, even, when considered within an utterly flawed framework. That's the scale of the challenge to dig yourselves out of.
moltar 6y ago
I’m not pro this or trying to justify it. But I just had a thought. Maybe they want to retain the execs to fix the mess? I think most people would start looking for a new job as soon as they heard that the company they work for is filing for bankruptcy. What would happen to a company if all good people left?
- paulie_a 6y ago
  Apparently they were not that good considering they bankrupted the company If anything you want them to leave,. Good riddance
- adrr 6y ago
  You could argue the people responsible for the decisions that resulted in the company going bankrupt aren’t the good people.
  - ipnon 6y ago
    It's legal to be a bad person in the United States. The government is purposely mute on the matter of the morals of its citizens. As a democracy, the principle that allows us to prevent this behavior, if we deem it unacceptable, is to codify it in law, and make the specific behavior illegal.
    - Apocryphon 6y ago
      They could mean good/bad in terms of business acumen and competence, not morality.
  - WrtCdEvrydy 6y ago
    They are... if you want someone to take the flak for extracting maximum stockholder value as the company fails, you call these guys in... they make a couple of million and go to the next company to fuck that one up.
  - hangonhn 6y ago
    “It is possible to commit no mistakes and still lose. That is not a weakness; that is life.” - Jean Luc Picard I'm not saying everyone of those people in charge are in the same boat but maybe we shouldn't be too hasty in judging them without knowing the specifics.
Wowfunhappy 6y ago
This sort of thing ought to be grounds for a lawsuit from shareholders, or other creditors.
- ipnon 6y ago
  It's certainly unsavory. What would the legal basis for that suit be? Would it be simpler to have Congress stake a claim than to have the judiciary make a decision with a legal code that remains muted on the issue?
  - jmalicki 6y ago
    Bankruptcy fraud? https://money.howstuffworks.com/personal-finance/debt-management/bankruptcy-fraud1.htm https://money.howstuffworks.com/personal-finance/debt-manage... Edit: specifically fraudulent conveyance, such as discussed here: https://www.americanbar.org/groups/business_law/publications/blt/2020/02/third-way/ https://www.americanbar.org/groups/business_law/publications...
- mcrae 6y ago
  Generally it’s the shareholders approving these payments. It’s in their interest, and perhaps in the interest of the creditors as well, to have a competent management team who know the company well in place to maximise enterprise value through Chapter 11.
  - rightbyte 6y ago
    The boards approve right? They are mostly a boys club rather than shareholder representatives. A executives union so to say.
ipnon 6y ago
Is there any research claiming that giant executive bonuses, in this case seemingly at the expense of the company they govern, is optimal for some macroeconomic quality that benefits the society at large? Or do we allow this behavior because we believe it is immoral to prevent giant executive bonuses as a matter of principle?
- deleted 6y ago
  [deleted]
- nickff 6y ago
  There is evidence in both directions, but the data isn't great, because one of the reasons that boards offer large bonuses is to attract 'talent' to troubled or stagnant companies (which don't look great on the resume). Jim Collins (author of "Good to Great") has made the case that other factors are much more important. The other thing to keep in mind is that the 'huge' bonuses usually aren't very large from an income statement point of view; if you bought an extra 0.5% growth (or savings), it was easily worth it. As to why this is allowed, I think it's seen as a private transaction between well-informed and consenting parties, so there needs to be a compelling reason for legislation and regulation.
  - amiga_500 6y ago
    Pay is not set by value created, it's set to outbid other companies to retain, and at a time when many executive jobs are about to go, I'd suggest the bidding is far from fierce. This is the board voting the board gets a pay rise.
  - jfengel 6y ago
    It is, however, very difficult to prove that it was the executive who actually got you that extra growth, since there's no control group and many variables. Executives will claim victory for any profits and blame outside factors for any losses, making it impossible to really know if a different candidate for half the salary would have done just as well.
    - 6y ago
pkaye 6y ago
Can't creditors go after them in bankruptcy court? If not I see a easy way to make money.
- hrasyid 6y ago
  According to the article it's a loophole > Under a 2005 bankruptcy law, companies are banned, with few exceptions, from paying executives retention bonuses while in bankruptcy. But the firms seized on a loophole by granting payouts before filing.
stepstop 6y ago
Well we had a chance to make such activity illegal, but we didn't. Maybe we can do it now, to prepare for the next downturn?
lend000 6y ago
While it looks immoral if you don't understand the mechanics, people are simply responding to incentives around bankruptcy laws. Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless). The real question is, should Chapter 11's even be allowed for corporations (as opposed to Chapter 7)? Shareholders vote for these because they know that in a Chapter 7 bankruptcy, their shares will likely be worthless because the creditors are owed more than the company's assets. So it's the creditors who are getting screwed. If you try to research companies that successfully turned around after a Chapter 11, you will be hard pressed to find major success stories, and I tend to think the world would be better off with more creative destruction. Even the ones listed here [0] did not have a pure Chapter 11 process -- some were bailed out by the government, Apple got private investment, and in the case of Marvel, the end result might have been the same if their assets were liquidated in Chapter 7 and Disney ended up picking them up. [0] https://www.investopedia.com/articles/personal-finance/051115/7-bankrupt-companies-came-back.asp https://www.investopedia.com/articles/personal-finance/05111...
- Groxx 6y ago
  It can be both bad and encouraged by incentives. Doesn't make it not-bad though.
  - lend000 6y ago
    Not in this case. That is the oversimplified emotional response you see in the comments, but it doesn't jive with reality. Let's say you are the COO of Hertz, making 300K salary and 1M in options. The shareholders vote for Chapter 11 and those options are now effectively worthless, so your income decreased by ~70%. Are you going to stick around and try to dig out the company without a retention bonus? Given that the shareholders are doing Chapter 11 and trying to turn the company around, there is nothing wrong with them voting for retention bonuses to try to keep the company rolling. The problem is that the system enables shareholders to do Chapter 11 without the debtors having a say in it, when the problem is typically debt.
    - 6y ago
gwbrooks 6y ago
I have trouble seeing how this is Something That Needs Fixing(tm). It's a shareholder problem because it's shareholder capital being spent on these bonuses. Both pre- and post-bankruptcy, shareholders are in the primary position to fix it.
- justicezyx 6y ago
  But we're shareholders grant the effective tools for controlling? I think there is none such tools for shareholders to curb such misconduct
- lend000 6y ago
  It isn't shareholder capital; it's almost always creditor capital when a public company is going bankrupt. It's a broken process when creditors don't get a vote in whether a company can apply for Chapter 11 bankruptcy (as opposed to Chapter 7 where the company assets are just liquidated). It incentivizes shareholders to vote for Chapter 11 because they know during a Chapter 7 their shares will be worthless anyway, because there won't be much (if anything) left after paying off debt.
  - hedora 6y ago
    It’s not just creditors that get screwed. Many of these companies have pension plans that will likely be zeroed out during bankruptcy. Also, if the company no longer exists (or contracts to cover the bonuses), then it stops serving whatever societal purposes it used to serve. For retail, all the infrastructure supporting the malls ends up being wasted, suppliers go bankrupt, communities lose jobs, neighboring stores fail once the mall loses its anchor store, etc, etc.
- gumby 6y ago
  Actually that’s not the case: in bankruptcy the shareholders are at the end of the line behind (in order): taxes, payroll, than the varying degrees of debt and other creditors. Only if anything is left is it distributed to the various degrees of shareholders. If there’s anyone to object it would presumably be the primary debt holders.
every 6y ago
Grifters. What else is new?
JoeCortopassi 6y ago
Of course they do. How else do you get people to stick around on a sinking ship? You and I wouldn't stay out of some sense of altruism, why would they? Heck, tech companies have to vest stock options over 4 years because most people would take the money and run. What does everyone think happens when everybody quits because there's no reason to work there? The money is just returned to investors? Even if that's all you did, you still need people who... - know where the money is - how to distribute it - how to stay compliant with the law - how to make sure oversight is in place so that people don't straight up embezzle - keep outside players away that would try and take equity Why on earth would someone stick around for such a sucky job, if the reward for doing well is getting laid off because the company tanked. Of course you need to pay people to stick around
- ashtonkem 6y ago
  I understand that that's what's necessary to keep executives around. What's less clear is whether this why everyone else, especially the shareholders, want the executives to stick around.
  - jbc1 6y ago
    If I offer you a deal on a dice roll where if it lands on 1 through 5 you get $1000 but if it lands on 6 you get nothing, and to play you only need to put in $10, that's a fantastic deal for you and the profit maximising move is to play. If the die lands on 6, that doesn't stop it having been the right move on your part to have played. Companies going bankrupt in extraordinary market circumstances doesn't mean they were mismanaged. Only that their 6 has come up.
    - ashtonkem 6y ago
      In principle I agree, in practice I'm less sure. I agree that "well, you drew the short straw in getting a pandemic" is a fair reason to explain an executive's failure socially, but I've never known investors to be this kind and charitable. In my experience investors want to extract value right now, and they're more than happy to chuck executives away if they think someone else could do better no matter what the underlying cause was. Secondly, while this behavior is galling in the current context, it's hardly new. The 2005 law banning executive bonuses during bankruptcy wouldn't be put in place if it wasn't already a problem. Under the general case you laid out above, investors appear happy to hand out bonuses for executives that crashed the company after rolling a 3.
abeppu 6y ago
> Hertz - which recently terminated more than 14,000 workers - paid senior executives bonuses of $1.5 million days before its May 22 bankruptcy, in part to recognize the uncertainty they faced from the pandemic’s impact on travel, the company said in a filing. Compensate the C-suite for confronting uncertainty, but fire the workers. This seems like another variant of "brutal capitalism for the poor, socialism for the rich". Normally we hear it for governments bailing out companies but not (normal) individuals, but here it's companies ensuring their highest paid remain well-paid and thousands of workers are fired.
- AdrianB1 6y ago
  It has nothing to do with capitalism or socialism, it's a corrupt compensation scheme for C level executives. Corrupted schemes exist in any political system.
dboreham 6y ago
Hmm. Under US bankruptcy code any payment made in the 90 days prior to filing is subject to being undone by the court (you have to pay the money back). Perhaps this rule doesn't apply to employee bonuses??
- refurb 6y ago
  Often the bankruptcy court has to approve executive compensation as a part of the process. Not sure if that’s a require for every bankruptcy or not.
- texasbigdata 6y ago
  There is a look back cause for executive compensation. And it claws back. To make it worse, it’s also very reputationally damaging to have your name dragged through the mud for a payment like that. So not best practices to do something like that by experienced management.
jl2718 6y ago
What exactly does an investor get in exchange for their money when they purchase common stock? Generally not dividends. Generally not assets. Generally not liquidation. Book value is meaningless in these scenarios. Every business fails eventually.
d--b 6y ago
I am appalled at the reaction I am seeing here. People on HN really think that it is ok for executives to maximize their own personal interest at the expense of other employees and creditors? Is that the true face of silicon valley? What happened to “make the world a better place”, or “don’t be evil”. Capitalism works as long as the people in charge are responsible, not if they try to extract as much juice from the system as possible. Your company is going bust, and you get a bonus? Fuck those guys, seriously.
stunt 6y ago
I think many executives simply have good and secure contracts in first place. I'm not surprised if they have clauses to cover bankruptcy scenarios. In some cases it's also wilt of a few executives, who try to onboard other executives so they don't stand out as the greedy guy.
scarface74 6y ago
I don’t really have a problem with this. I’ve never been an executive, but I have seen first hand what happens when a company is in distress. I worked for a small company that was on its last legs and had been through rounds of layoffs. Our investors wanted to keep the company afloat long enough to get someone to buy us out. They made all of us one promise - for every hour we worked, we would get paid and on time. They made some key employees an offer of a retention bonus to stick around for 6 months or until the company was sold. I happen to be one of those employees because I took over development of a key piece of software after the founder was kicked out. (It was an obscure proprietary system written in C++/MFC with a little bit of assembly and I was the only graybeard that knew enough to maintain it.) The last thing you want is key employees jumping ship at the time you are trying to either save a sinking ship or at least get some type of salvage value from it.
- koheripbal 6y ago
  I've had the same experience. No one wants to work at a bankrupt low-morale company, so the only way to keep key people was to offer special bonuses for retention to keep things together through the bankruptcy process If you think about it, it's literally the only way to do it. These folks have usually lost a ton of money on their company stock options. The only way to keep them around is to pay them more in the short term.
  - jzb 6y ago
    "The only way to keep them around..." I call BS. It's not as if there's a shortage of employees or execs to go around right now. When a company is taking its lumps, the execs should too. That should be part of the deal. If the people who actually do the work are getting laid off or asked to double their efforts to compensate for people laid off, then the execs ought to be content to ride out a period without bonuses and work to make those stocks rise in value again. As usual, when things are good - execs see the profits, the vast majority of workers don't. When things are shit, the execs hand themselves bonuses while they cry crocodile tears about laying people off to please shareholders. Fuck them.
deleted 6y ago
[deleted]
eat_veggies 6y ago
There are so many comments in this thread justifying this behavior. > The last thing you want is key employees jumping ship > Of course they do. How else do you get people to stick around on a sinking ship? > While it looks immoral if you don't understand the mechanics, people are simply responding to incentives around bankruptcy laws Do people really believe that the mechanics of bankruptcy laws, and the incentives to retain executives instead of workers, are just part of the natural order of the universe? That they appeared out of nowhere, align perfectly with morality, and haven't been deliberately structured this way to protect the ruling class?
- devmunchies 6y ago
  >...are just part of the natural order of the universe? That they appeared out of nowhere, align perfectly with morality... Do you think morality is part of the natural order of the universe? It’s definitely not.
  - falcor84 6y ago
    I'm not going to take a side here, but there would be quite a few philosophers, legal professionals and political scientists who would argue that. Wikipedia would be a good starting point - https://en.wikipedia.org/wiki/Natural_law https://en.wikipedia.org/wiki/Natural_law
  - wolfram74 6y ago
    It isn't part of the natural universe, but neither is bankruptcy law, so why care overly about it when thinking whether or not to change things? What is economically viable does depend a bit on physical law, but it also depends a great deal by the legal ecology we humans decide upon collectively.
- jonahbenton 6y ago
  No, they are not part of the natural order of the universe, but with respect, thinking about this in "ruling class" terms is completely wrong. Neither word "ruling" nor "class" means anything in modern Western society, and neither do the two of them together. Using inaccurate and imprecise language commits two sins- fails to communicate why things are and fails to elucidate how they might be changed. The word owner has precise meaning, as does the word creditor. This behavior is entirely about protecting the interests of owners and creditors. Sometimes people/orgs playing these roles are large and powerful but often they are not. There is a huge literature here. The most recent best book I've read on these issues is Katarina Pistor "The Code of Capital." Highly recommend pursuing a path to adopt more precise language on these matters. Cheers.
williesleg 6y ago
It's the Great China Virus Lie of 2020. Chinese bots will defend to their death.
michaelcampbell 6y ago
Let's be clear here, "firms" are not thinking, sentient things. "On the eve of bankruptcy, US executives shower themselves with bonuses"

298 points by humanlion87 6y ago

The execs getting the bonus know that other USA execs won't frown on this. The execs getting the bonus know regulators won't come after them. The execs getting the bonus know the media won't name and shame them. The execs getting the bonus know that nobody in their social circle will shun them. The execs getting the bonus don't even think this is wrong, as the main aim is to grab what you can when you can, and if it's immoral, well someone should change the rules. Yes laws need changing, but laws are set by culture, ultimately. This is a deep, deep cultural problem that is killing the USA, and I've yet to see it acknowledged anywhere in the mainstream.

inerte 6y ago
Depends what you mean by mainstream, or acknowledged. That's one of main talking points of Bernie Sanders, which was almost there as the Democrat candidate. I feel like everybody had the chance to see it, so it was mainstream. Acknowledged in the sense that we recognize this an as actual, structural and cultural problem? Yeah, not happened. Not in this country, where "the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires". I at least hope people understood being rich and running a business doesn't automatically translate to being good at public office.
- hedora 6y ago
  Wasn’t Trump’s other campaign slogan “Drain the swamp?”
kaiju0 6y ago
It's completely rational. The company is going into bankruptcy. The money can be mine or someone else's. If you had a chance to get $1,000,000 or the bank takes it with no consequences what do you do?
- triceratops 6y ago
  The money is already someone else's, by law: the creditors'. Rational != ethical, which is what the GP is arguing. There are many things that are entirely rational to do that we nevertheless don't do. Either due to societal mores or laws, or both.
- amiga_500 6y ago
  And that is exhibit A. Ingrained into the culture. Rational, even, when considered within an utterly flawed framework. That's the scale of the challenge to dig yourselves out of.

moltar 6y ago

I’m not pro this or trying to justify it. But I just had a thought. Maybe they want to retain the execs to fix the mess? I think most people would start looking for a new job as soon as they heard that the company they work for is filing for bankruptcy. What would happen to a company if all good people left?

paulie_a 6y ago
Apparently they were not that good considering they bankrupted the company If anything you want them to leave,. Good riddance
adrr 6y ago
You could argue the people responsible for the decisions that resulted in the company going bankrupt aren’t the good people.
- ipnon 6y ago
  It's legal to be a bad person in the United States. The government is purposely mute on the matter of the morals of its citizens. As a democracy, the principle that allows us to prevent this behavior, if we deem it unacceptable, is to codify it in law, and make the specific behavior illegal.
  - Apocryphon 6y ago
    They could mean good/bad in terms of business acumen and competence, not morality.
- WrtCdEvrydy 6y ago
  They are... if you want someone to take the flak for extracting maximum stockholder value as the company fails, you call these guys in... they make a couple of million and go to the next company to fuck that one up.
- hangonhn 6y ago
  “It is possible to commit no mistakes and still lose. That is not a weakness; that is life.” - Jean Luc Picard I'm not saying everyone of those people in charge are in the same boat but maybe we shouldn't be too hasty in judging them without knowing the specifics.

Wowfunhappy 6y ago

This sort of thing ought to be grounds for a lawsuit from shareholders, or other creditors.

ipnon 6y ago
It's certainly unsavory. What would the legal basis for that suit be? Would it be simpler to have Congress stake a claim than to have the judiciary make a decision with a legal code that remains muted on the issue?
- jmalicki 6y ago
  Bankruptcy fraud? https://money.howstuffworks.com/personal-finance/debt-management/bankruptcy-fraud1.htm https://money.howstuffworks.com/personal-finance/debt-manage... Edit: specifically fraudulent conveyance, such as discussed here: https://www.americanbar.org/groups/business_law/publications/blt/2020/02/third-way/ https://www.americanbar.org/groups/business_law/publications...
mcrae 6y ago
Generally it’s the shareholders approving these payments. It’s in their interest, and perhaps in the interest of the creditors as well, to have a competent management team who know the company well in place to maximise enterprise value through Chapter 11.
- rightbyte 6y ago
  The boards approve right? They are mostly a boys club rather than shareholder representatives. A executives union so to say.

ipnon 6y ago

Is there any research claiming that giant executive bonuses, in this case seemingly at the expense of the company they govern, is optimal for some macroeconomic quality that benefits the society at large? Or do we allow this behavior because we believe it is immoral to prevent giant executive bonuses as a matter of principle?

deleted 6y ago
[deleted]
nickff 6y ago
There is evidence in both directions, but the data isn't great, because one of the reasons that boards offer large bonuses is to attract 'talent' to troubled or stagnant companies (which don't look great on the resume). Jim Collins (author of "Good to Great") has made the case that other factors are much more important. The other thing to keep in mind is that the 'huge' bonuses usually aren't very large from an income statement point of view; if you bought an extra 0.5% growth (or savings), it was easily worth it. As to why this is allowed, I think it's seen as a private transaction between well-informed and consenting parties, so there needs to be a compelling reason for legislation and regulation.
- amiga_500 6y ago
  Pay is not set by value created, it's set to outbid other companies to retain, and at a time when many executive jobs are about to go, I'd suggest the bidding is far from fierce. This is the board voting the board gets a pay rise.
- jfengel 6y ago
  It is, however, very difficult to prove that it was the executive who actually got you that extra growth, since there's no control group and many variables. Executives will claim victory for any profits and blame outside factors for any losses, making it impossible to really know if a different candidate for half the salary would have done just as well.
  - 6y ago

pkaye 6y ago

Can't creditors go after them in bankruptcy court? If not I see a easy way to make money.

hrasyid 6y ago
According to the article it's a loophole > Under a 2005 bankruptcy law, companies are banned, with few exceptions, from paying executives retention bonuses while in bankruptcy. But the firms seized on a loophole by granting payouts before filing.

stepstop 6y ago

Well we had a chance to make such activity illegal, but we didn't. Maybe we can do it now, to prepare for the next downturn?

lend000 6y ago

While it looks immoral if you don't understand the mechanics, people are simply responding to incentives around bankruptcy laws. Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless). The real question is, should Chapter 11's even be allowed for corporations (as opposed to Chapter 7)? Shareholders vote for these because they know that in a Chapter 7 bankruptcy, their shares will likely be worthless because the creditors are owed more than the company's assets. So it's the creditors who are getting screwed. If you try to research companies that successfully turned around after a Chapter 11, you will be hard pressed to find major success stories, and I tend to think the world would be better off with more creative destruction. Even the ones listed here [0] did not have a pure Chapter 11 process -- some were bailed out by the government, Apple got private investment, and in the case of Marvel, the end result might have been the same if their assets were liquidated in Chapter 7 and Disney ended up picking them up. [0] https://www.investopedia.com/articles/personal-finance/051115/7-bankrupt-companies-came-back.asp https://www.investopedia.com/articles/personal-finance/05111...

Groxx 6y ago
It can be both bad and encouraged by incentives. Doesn't make it not-bad though.
- lend000 6y ago
  Not in this case. That is the oversimplified emotional response you see in the comments, but it doesn't jive with reality. Let's say you are the COO of Hertz, making 300K salary and 1M in options. The shareholders vote for Chapter 11 and those options are now effectively worthless, so your income decreased by ~70%. Are you going to stick around and try to dig out the company without a retention bonus? Given that the shareholders are doing Chapter 11 and trying to turn the company around, there is nothing wrong with them voting for retention bonuses to try to keep the company rolling. The problem is that the system enables shareholders to do Chapter 11 without the debtors having a say in it, when the problem is typically debt.
  - 6y ago

gwbrooks 6y ago

I have trouble seeing how this is Something That Needs Fixing(tm). It's a shareholder problem because it's shareholder capital being spent on these bonuses. Both pre- and post-bankruptcy, shareholders are in the primary position to fix it.

justicezyx 6y ago
But we're shareholders grant the effective tools for controlling? I think there is none such tools for shareholders to curb such misconduct
lend000 6y ago
It isn't shareholder capital; it's almost always creditor capital when a public company is going bankrupt. It's a broken process when creditors don't get a vote in whether a company can apply for Chapter 11 bankruptcy (as opposed to Chapter 7 where the company assets are just liquidated). It incentivizes shareholders to vote for Chapter 11 because they know during a Chapter 7 their shares will be worthless anyway, because there won't be much (if anything) left after paying off debt.
- hedora 6y ago
  It’s not just creditors that get screwed. Many of these companies have pension plans that will likely be zeroed out during bankruptcy. Also, if the company no longer exists (or contracts to cover the bonuses), then it stops serving whatever societal purposes it used to serve. For retail, all the infrastructure supporting the malls ends up being wasted, suppliers go bankrupt, communities lose jobs, neighboring stores fail once the mall loses its anchor store, etc, etc.
gumby 6y ago
Actually that’s not the case: in bankruptcy the shareholders are at the end of the line behind (in order): taxes, payroll, than the varying degrees of debt and other creditors. Only if anything is left is it distributed to the various degrees of shareholders. If there’s anyone to object it would presumably be the primary debt holders.

every 6y ago

Grifters. What else is new?

JoeCortopassi 6y ago

Of course they do. How else do you get people to stick around on a sinking ship? You and I wouldn't stay out of some sense of altruism, why would they? Heck, tech companies have to vest stock options over 4 years because most people would take the money and run. What does everyone think happens when everybody quits because there's no reason to work there? The money is just returned to investors? Even if that's all you did, you still need people who... - know where the money is - how to distribute it - how to stay compliant with the law - how to make sure oversight is in place so that people don't straight up embezzle - keep outside players away that would try and take equity Why on earth would someone stick around for such a sucky job, if the reward for doing well is getting laid off because the company tanked. Of course you need to pay people to stick around

ashtonkem 6y ago
I understand that that's what's necessary to keep executives around. What's less clear is whether this why everyone else, especially the shareholders, want the executives to stick around.
- jbc1 6y ago
  If I offer you a deal on a dice roll where if it lands on 1 through 5 you get $1000 but if it lands on 6 you get nothing, and to play you only need to put in $10, that's a fantastic deal for you and the profit maximising move is to play. If the die lands on 6, that doesn't stop it having been the right move on your part to have played. Companies going bankrupt in extraordinary market circumstances doesn't mean they were mismanaged. Only that their 6 has come up.
  - ashtonkem 6y ago
    In principle I agree, in practice I'm less sure. I agree that "well, you drew the short straw in getting a pandemic" is a fair reason to explain an executive's failure socially, but I've never known investors to be this kind and charitable. In my experience investors want to extract value right now, and they're more than happy to chuck executives away if they think someone else could do better no matter what the underlying cause was. Secondly, while this behavior is galling in the current context, it's hardly new. The 2005 law banning executive bonuses during bankruptcy wouldn't be put in place if it wasn't already a problem. Under the general case you laid out above, investors appear happy to hand out bonuses for executives that crashed the company after rolling a 3.

abeppu 6y ago

> Hertz - which recently terminated more than 14,000 workers - paid senior executives bonuses of $1.5 million days before its May 22 bankruptcy, in part to recognize the uncertainty they faced from the pandemic’s impact on travel, the company said in a filing. Compensate the C-suite for confronting uncertainty, but fire the workers. This seems like another variant of "brutal capitalism for the poor, socialism for the rich". Normally we hear it for governments bailing out companies but not (normal) individuals, but here it's companies ensuring their highest paid remain well-paid and thousands of workers are fired.

AdrianB1 6y ago
It has nothing to do with capitalism or socialism, it's a corrupt compensation scheme for C level executives. Corrupted schemes exist in any political system.

dboreham 6y ago

Hmm. Under US bankruptcy code any payment made in the 90 days prior to filing is subject to being undone by the court (you have to pay the money back). Perhaps this rule doesn't apply to employee bonuses??

refurb 6y ago
Often the bankruptcy court has to approve executive compensation as a part of the process. Not sure if that’s a require for every bankruptcy or not.
texasbigdata 6y ago
There is a look back cause for executive compensation. And it claws back. To make it worse, it’s also very reputationally damaging to have your name dragged through the mud for a payment like that. So not best practices to do something like that by experienced management.

jl2718 6y ago

What exactly does an investor get in exchange for their money when they purchase common stock? Generally not dividends. Generally not assets. Generally not liquidation. Book value is meaningless in these scenarios. Every business fails eventually.

d--b 6y ago

I am appalled at the reaction I am seeing here. People on HN really think that it is ok for executives to maximize their own personal interest at the expense of other employees and creditors? Is that the true face of silicon valley? What happened to “make the world a better place”, or “don’t be evil”. Capitalism works as long as the people in charge are responsible, not if they try to extract as much juice from the system as possible. Your company is going bust, and you get a bonus? Fuck those guys, seriously.

stunt 6y ago

I think many executives simply have good and secure contracts in first place. I'm not surprised if they have clauses to cover bankruptcy scenarios. In some cases it's also wilt of a few executives, who try to onboard other executives so they don't stand out as the greedy guy.

scarface74 6y ago

I don’t really have a problem with this. I’ve never been an executive, but I have seen first hand what happens when a company is in distress. I worked for a small company that was on its last legs and had been through rounds of layoffs. Our investors wanted to keep the company afloat long enough to get someone to buy us out. They made all of us one promise - for every hour we worked, we would get paid and on time. They made some key employees an offer of a retention bonus to stick around for 6 months or until the company was sold. I happen to be one of those employees because I took over development of a key piece of software after the founder was kicked out. (It was an obscure proprietary system written in C++/MFC with a little bit of assembly and I was the only graybeard that knew enough to maintain it.) The last thing you want is key employees jumping ship at the time you are trying to either save a sinking ship or at least get some type of salvage value from it.

koheripbal 6y ago
I've had the same experience. No one wants to work at a bankrupt low-morale company, so the only way to keep key people was to offer special bonuses for retention to keep things together through the bankruptcy process If you think about it, it's literally the only way to do it. These folks have usually lost a ton of money on their company stock options. The only way to keep them around is to pay them more in the short term.
- jzb 6y ago
  "The only way to keep them around..." I call BS. It's not as if there's a shortage of employees or execs to go around right now. When a company is taking its lumps, the execs should too. That should be part of the deal. If the people who actually do the work are getting laid off or asked to double their efforts to compensate for people laid off, then the execs ought to be content to ride out a period without bonuses and work to make those stocks rise in value again. As usual, when things are good - execs see the profits, the vast majority of workers don't. When things are shit, the execs hand themselves bonuses while they cry crocodile tears about laying people off to please shareholders. Fuck them.

deleted 6y ago

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eat_veggies 6y ago

There are so many comments in this thread justifying this behavior. > The last thing you want is key employees jumping ship > Of course they do. How else do you get people to stick around on a sinking ship? > While it looks immoral if you don't understand the mechanics, people are simply responding to incentives around bankruptcy laws Do people really believe that the mechanics of bankruptcy laws, and the incentives to retain executives instead of workers, are just part of the natural order of the universe? That they appeared out of nowhere, align perfectly with morality, and haven't been deliberately structured this way to protect the ruling class?

devmunchies 6y ago
>...are just part of the natural order of the universe? That they appeared out of nowhere, align perfectly with morality... Do you think morality is part of the natural order of the universe? It’s definitely not.
- falcor84 6y ago
  I'm not going to take a side here, but there would be quite a few philosophers, legal professionals and political scientists who would argue that. Wikipedia would be a good starting point - https://en.wikipedia.org/wiki/Natural_law https://en.wikipedia.org/wiki/Natural_law
- wolfram74 6y ago
  It isn't part of the natural universe, but neither is bankruptcy law, so why care overly about it when thinking whether or not to change things? What is economically viable does depend a bit on physical law, but it also depends a great deal by the legal ecology we humans decide upon collectively.
jonahbenton 6y ago
No, they are not part of the natural order of the universe, but with respect, thinking about this in "ruling class" terms is completely wrong. Neither word "ruling" nor "class" means anything in modern Western society, and neither do the two of them together. Using inaccurate and imprecise language commits two sins- fails to communicate why things are and fails to elucidate how they might be changed. The word owner has precise meaning, as does the word creditor. This behavior is entirely about protecting the interests of owners and creditors. Sometimes people/orgs playing these roles are large and powerful but often they are not. There is a huge literature here. The most recent best book I've read on these issues is Katarina Pistor "The Code of Capital." Highly recommend pursuing a path to adopt more precise language on these matters. Cheers.

williesleg 6y ago

It's the Great China Virus Lie of 2020. Chinese bots will defend to their death.

michaelcampbell 6y ago

Let's be clear here, "firms" are not thinking, sentient things. "On the eve of bankruptcy, US executives shower themselves with bonuses"