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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 aro

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.
  - thaumaturgy 6y ago
    > Are you going to stick around and try to dig out the company without a retention bonus? No. You have a couple of times framed opposition to executive bonuses in these situations as "simple" and "emotional", while expressing an appreciation for "creative destruction". So, if an executive would rather leave than turn a company around while tightening their own belt -- especially given that some of these executives can be assumed to be at least partly responsible for the company's plight anyway -- then why not encourage them to leave, and open the door for a more creative, new executive? Imagine if, instead of paying extortionate sums of cash to retain the architects of their destruction, large companies created an entirely new market for c-levels that wanted to specialize in turnarounds.
    - lend000 6y ago
      What you're describing sounds nice but apparently the incentives don't support it (perhaps because it's better to keep the people who know all about their company than contract execs who know nothing about the company or perhaps even the industry). I agree with part of what you are saying, hence my tirade about how Chapter 11 bankruptcy laws need reform. But what bothers me is that most people just assume the executives (who mostly aren't even responsible for their pay) are evil, without understanding how everyone acted rationally and morally under the incentives of the broken system. The fact that it's happening on such a broad scale should be a clue that the system is broken, rather than a statistically significant collection of individuals. Just to spell it out for everyone, there are a few actions happening here, highly incentivized by the system. I doubt many of the self righteous commenters here would do anything differently put in a position to make any of these decisions. 1. You are a major shareholder of a company. The company cannot pay its debts. The debts are greater than the company's assets. You have two options. Vote to file chapter 7 (liquidate to the debtors and get nothing) or file chapter 11 (get the court to forgive as much debt as possible and maybe you will get something back if the company turns itself around). Many of the major shareholders hold significant portions of their net worth in one company, or are institutions (e.g. Vanguard) which have a responsibility to do the financially prudent thing for mom and pop investors like you and me. 2. Predictably, the shareholders voted to file chapter 11. This has already happened. Given that it has happened, you want to give the company the best chance of making a recovery and returning value to shareholders. It makes sense to partially restore executive salaries with retention bonuses, so that you have leadership to keep the company afloat while restructuring. Note that most of these salaries would have been heavily impacted by the bankruptcy filing, in which options and RSU's (the majority of most exec salaries) are now nearly worthless. So you sign a retention bonus as soon as you know bankruptcy is inevitable. Don't hate the players, hate the game. As I tried to elucidate in this thread, the problem is not any immoral actors, but the power of corporate chapter 11 bankruptcy and the fact that creditors' do not get to vote on the likelihood of it being a better ROI for them. It's simpler to blame it on the evil greedy executives (which makes no sense in this case) or try to make all sorts of band-aid amendments to how you can give bonuses to executives during a bankruptcy, but that misses the core problem.
RockIslandLine 6y ago
"Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless)." So they quit, and the company goes bankrupt on a different timeline. Why should either society or shareholders accept new bonus declarations?
- lend000 6y ago
  If you read the whole comment, you will see we are probably in agreement. Corporate chapter 11 bankruptcy laws are too powerful, and shift too much power from creditors to shareholders, imo.
  - Apocryphon 6y ago
    It still sounds immoral even if you read the rest of the comment.
    - lend000 6y ago
      Perhaps it would make more sense to you if the headline were phrased: "On eve of bankruptcy, US firms restore a fraction of executives' previous salaries with retention bonuses, now that their options and RSU's are worthless, which of course made up most of their salaries." But that doesn't sell clicks as well to people who already have their minds made up.
      - idolaspecus 6y ago
        I don't know about selling clicks in general but, for me, that headline is even more compelling. Corporate executives' salaries are canonically justified by the fact that they're tied to the success of the corporation. If executives get their millions even when their corporations tank, I see a serious problem.
        invalidOrTaken 6y ago
        It's an interesting failure mode I've only recently started to see clearly---before bankruptcy, shareholders are comfortable, thinking, "w/e, if the company goes bankrupt, our management gets nothing." But they fail to realize that if the company does go bankrupt, or close to it, it will be hard to find a replacement for someone with that level of knowledge of the firm. So the initial implied threat is now toothless.
hedora 6y ago
I’ll do it for their old comp. It’s not like I’ll do any worse than they did.
- giarc 6y ago
  Exactly. It's a really optimistic (and in my opinion terrible) view to think that the people that ran the company into bankruptcy can steer it out if only they got paid a bit more money.
xkcd-sucks 6y ago
So they quit, and someone hungrier + lower on the ladder gets a chance to prove themselves by turning the company around, rewarded by staying in the position when it's cushy again.
- lend000 6y ago
  >So they quit I doubt most of the executives see themselves as personally responsible for the financial situations of their companies, especially during an unprecedented global economic shutdown. Not because they are any different from you or me or any of these other self righteous commenters, but because they are the same. If American culture were more like ancient samurai culture, perhaps they could commit seppuku to restore their honor. But I would prefer to restore proper incentives instead, and weaken the power of chapter 11 so this isn't a problem in the first place.
  - computerphage 6y ago
    It wasn't unprecedented.
    - sgt-serverless 6y ago
      the pandemic may not have been, but the scale to which businesses were shutdown was.
  - texasbigdata 6y ago
    Look at the Bain 2020 annual “private equity” report. Back of the envelope math, at 10x purchase price and 7x leverage, 10 to 15% of revenue goes to debt coverage costs and a 5% revenue decline triggers the bank covenants and causes a technical default. It’s the executives fault that happened? Maybe it is, but the capital structure and the operating team are separate and distinct things. It’s also important to consider, if the bank debt can’t convert to equity via a ch11, then overall availability of capital will sharply decrease. Which in turn hurts every business around.
- mostlyghostly 6y ago
bpodgursky 6y ago
That's... insane. The point of chapter 11 is that the company does NOT liquidate. Most employees DO NOT LOSE THEIR JOBS. Liquidating a functioning but indebted company destroys any remaining value (there is huge value in the structure of a business -- it's not the sum of inventory and real estate). And most importantly... EVERY SINGLE EMPLOYEE LOSES THEIR JOB There is absolutely no societal value in forcing companies to sell themselves off piece by piece, and sending every employee onto the street. Let the shareholders get wiped out. But don't force the company to fold and collapse unless it's unavoidable!
- lend000 6y ago
  Companies generally don't file bankruptcy when they are "functioning but indebted." They file when they can't even afford to make their next (or past-due) debt payment, and no creditors will dare to lend any more to them. Don't you think creditors should have a say in whether a company should be allowed to delete some debt and try to become profitable again? If the company is deep in debt beyond its assets, but the creditor thinks the company is a truly valuable business, then it might vote for chapter 11 under certain terms. Otherwise, you are just enabling the bad incentives described in this thread, including rewarding the failed execs with retention bonuses. But as I mentioned in the parent, these bankruptcies do not have a high percentage of success stories, and there are many repeat offenders who take advantage of the system. Yes, people at the failed company will have to find new jobs. That is called structural unemployment, and it is a normal part of progress.
  - Ghex 6y ago
    > Don't you think creditors should have a say in whether a company should be allowed to delete some debt and try to become profitable again? Creditors already do have a say don't they? At the moment of filing, director's fiduciary duties expand to residual claimants in addition to shareholders. In addition, creditors have paths to reclaim fraudulent transfers (bonuses included) in court although it is a hard case to win. Creditors can also ask the court to convert to Chapter 7, but this is almost always in no one's best interest (shareholders wiped out, junior creditors wiped out, senior creditors will probably lose a non trivial amount, everyone loses a job).
II2II 6y ago
> Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless). Why not? These executives are paid considerably more than rank-and-file employees under normal circumstances, yet still manage to get bonuses when things turn sour. In contrast, that rank-and-file will be expected to take a pay cut, work more, or lose their livelihood. It flies in the face of the traditional reasons given for the high pay of executives: this has nothing to do with how much value any given person contributes, since everyone is expected to contribute more while a certain population is expected to receive a smaller share; this has nothing to do with the burden of risk, since the people taking the greater risk are the ones who are paid least (in terms of employees) or are taking the brunt of the losses (in terms of investors). So yes, it is immoral.
- lend000 6y ago
  > So yes, it is immoral. Who did the immoral thing here? The executives don't set their own pay, and didn't necessarily ask for a bonus. What, you would decline the bonus and step down to restore your honor in their position? Doubtful. Meanwhile, the shareholders are giving bonuses which likely result in lower overall comps for these executives, after taking into account that the RSU's and options in their comp packages become nearly worthless. This is done to keep the company operating smoothly during restructuring. Also, read the rest of the thread to get a better understanding of the mechanics before casting judgment. At every step of this process, the relevant decision makers made the rational and moral choice to arrive at this situation, as dictated by the US corporate bankruptcy system.
  - User23 6y ago
    While technically the board of directors sets executive compensation, one must remember that those board members are largely executives at other companies and the executives are often board members elsewhere. So in practice it’s a circlejerk and executives do set their own compensation via implicit quid pro quo. Also, you appear to be confusing morality with legality. Screwing over line employees up to and including looting the pension funds to pay executive bonuses is legal (see Hostess bankruptcy for an example), but it’s also immoral.
Spartan-S63 6y ago
That's a good point. It would be interesting to get rid of Chapter 11 bankruptcy laws and force Chapter 7 instead. After all, it's shareholders that push companies to seek short term gains rather than long term trends, so when the company goes belly up, shareholders should be left holding that bag.
- texasbigdata 6y ago
  This would cause unreal job losses. Why in the world would you burn down a house just because someone bought it at too high of a price and now can’t afford the mortgage? How is that societally beneficial?
  - luckylion 6y ago
    On the other hand, it frees up resources and market share for companies that have better policies and are looking beyond a 30 day time frame. And it's not like the house would burn down. The assets wouldn't go poof, they'd be auctioned off. The employees will lose their jobs, but then again, a competitor will be hiring because they will have more business, unless there is no market for the offered product at all. And if there's no market at all, then why would we want to spend resources to run a company serving it? An expensive real-life Company Simulator 2000?
    - Spartan-S63 6y ago
      Exactly. We should be encouraging policies that flush out value-less companies. The financial markets can't be the winners of capitalism. The consumers have to be the winners of capitalism and the only way you do that is by finding ways to make money change hands more rapidly and making markets more perfectly competitive.
  - kelnos 6y ago
    And how does the current system not cause huge job losses? The people who stand the most to lose when they lose their jobs still end up losing their jobs, either way. The people who are remaining at the company after the layoffs are -- if the layoffs are done right -- the most valuable people, who would have the least trouble finding a new job if the restructuring fails.
gethoht 6y ago
So executives reap massive gains during both profits and losses. They literally cannot lose. Yet somehow this is moral while millions get laid off and are tasked with "pulling themselves up by their bootstraps" because capitalism... Capitalism in its current form has no morals at all.
texasbigdata 6y ago
This is patently false. 11s work. You know know how you can prove it? There’s less than a handful of chapter 22s (11, followed by an 11). Fundamentally it’s better for society for capital structure participants to get wiped out, including most non-wage perpetuation liabilities than for the company to just die. Greenspan wrote a sweeping history of American capitalism over 3 centuries (great book) and his belief was that American bankruptcy was one of the greatest contributors to long term economics growth. which is what roughly drives American average wellbeing (give or take). Sorry but just not true.
- lend000 6y ago
  You'll need a source for your aggressive claims -- these suggest that chapter 11 recidivism isn't that rare ("less than a handful" is patently false) [0][1]. And I wouldn't go so far as to abolish it, but to give debtors a stronger vote in the proceedings. Right now, the balance of power strongly favors shareholders, socializing the losses amongst creditors and prolonging the demise of companies that have no future (e.g. JC Penney). [0] https://blogs.harvard.edu/bankruptcyroundtable/tag/chapter-22/ https://blogs.harvard.edu/bankruptcyroundtable/tag/chapter-2... [1] https://www.reuters.com/article/us-bankruptcy-repeats/companies-turn-to-bankruptcy-again-and-again-idUSTRE8251N120120307 https://www.reuters.com/article/us-bankruptcy-repeats/compan...
  - texasbigdata 6y ago
    Less than 1%. # of 22s (1) / total cases (2). To your following point, that’s not how bankruptcy works. Creditors can credit bid, creditors can hand together and push a company into involuntary bankruptcy (not common), creditors have a tremendous amount of remedies whereas shareholders do not. It would be a super long discussion really chopping this up, as to why, however look up recovery rates for different assets and/or market prices for various liquid (aka tradeable) assets after a company files for bankruptcy. You will find the higher up the capital structure the security (aka secured debt, followed by unsecured debt, followed by equity) the higher the price/recovery/expected value. The link you sent was interesting though. Thanks for sharing. 1. https://www.uscourts.gov/statistics-reports/us-bankruptcy-courts-judicial-business-2017 https://www.uscourts.gov/statistics-reports/us-bankruptcy-co... 2. https://www.google.com/amp/s/www.sissonlawoffice.com/blog/filing-again-understanding-chapter-22-bankruptcy%3Fhs_amp%3Dtrue https://www.google.com/amp/s/www.sissonlawoffice.com/blog/fi... Quote: “ Radio Shack made the news in 2017 when it filed for Chapter 22. That second Chapter 11 came only two years after it underwent a restructuring in 2015. Instead of opting to continue the business, its owner, General Wireless Operations, chose to liquidate all the remaining retail outlets.” ....seems pretty rare to me.
JKCalhoun 6y ago
> While it looks immoral if you don't understand the mechanics, people are simply responding to incentives around bankruptcy laws. Still looks immoral.
dehrmann 6y ago
> Nobody wants to try to turn around a bankrupt company at their old salary I'll take it a step further. Even in Chapter 7, you want to retain certain key people so debt holders can get the best return. Sale of assets and negotiating debt won't go as smoothly without those people, and the process could be tied up in bankruptcy court for years. It's a job only specific people would do well it, and it's a job no one wants, hence the high pay.
- kelnos 6y ago
  This really just perpetuates the attitude that the only thing that matters is finance, and all the workers can just go pound sand.
  - scarface74 6y ago
    It is. The only purpose of a business is to make money. If workers are so hurt by being laid off, that’s not the fault of corporations acting rationally. That’s the fault of our system where the government doesn’t have an adequate social safety net in place. We should stop expecting corporate America to be responsible for “taking care of their employees”. There job should be to focus on profits and pay taxes to support social programs.
    - dehrmann 6y ago
      > The only purpose of a business is to make money. It's also the only reason workers show up.
  - koheripbal 6y ago
    Any worker that had stock options comp and is needed for the bankruptcy process will get similar good deals. Who told you companies weren't about making money? That's literally the point of them.
  - dehrmann 6y ago
    I'm a proponent of balancing shareholder, employee, and customer interests, but we're talking about bankrupt companies; those workers are losing their jobs regardless. You're paying the finance team to hang around so employees get their last paychecks rather than lining up as creditors in the bankruptcy court.
monadic2 6y ago
Lots of immorality is individually incentivized and legal. This doesn’t make it moral. I’m just confused why you bring it up when you’re clearly making a material argument for political change—of course this is immoral! That should be the impetus for the change.
fred_is_fred 6y ago
Maybe, just maybe, the same executives that lead into bankruptcy aren't the right ones to lead out of bankruptcy - and should not be rewarded for failure?
chooseaname 6y ago
Bonuses should reflect success. Succeed at keeping the company afloat until sold? Bonus. Succeed in turning company around? Bonus. Nothing before.

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.
- thaumaturgy 6y ago
  > Are you going to stick around and try to dig out the company without a retention bonus? No. You have a couple of times framed opposition to executive bonuses in these situations as "simple" and "emotional", while expressing an appreciation for "creative destruction". So, if an executive would rather leave than turn a company around while tightening their own belt -- especially given that some of these executives can be assumed to be at least partly responsible for the company's plight anyway -- then why not encourage them to leave, and open the door for a more creative, new executive? Imagine if, instead of paying extortionate sums of cash to retain the architects of their destruction, large companies created an entirely new market for c-levels that wanted to specialize in turnarounds.
  - lend000 6y ago
    What you're describing sounds nice but apparently the incentives don't support it (perhaps because it's better to keep the people who know all about their company than contract execs who know nothing about the company or perhaps even the industry). I agree with part of what you are saying, hence my tirade about how Chapter 11 bankruptcy laws need reform. But what bothers me is that most people just assume the executives (who mostly aren't even responsible for their pay) are evil, without understanding how everyone acted rationally and morally under the incentives of the broken system. The fact that it's happening on such a broad scale should be a clue that the system is broken, rather than a statistically significant collection of individuals. Just to spell it out for everyone, there are a few actions happening here, highly incentivized by the system. I doubt many of the self righteous commenters here would do anything differently put in a position to make any of these decisions. 1. You are a major shareholder of a company. The company cannot pay its debts. The debts are greater than the company's assets. You have two options. Vote to file chapter 7 (liquidate to the debtors and get nothing) or file chapter 11 (get the court to forgive as much debt as possible and maybe you will get something back if the company turns itself around). Many of the major shareholders hold significant portions of their net worth in one company, or are institutions (e.g. Vanguard) which have a responsibility to do the financially prudent thing for mom and pop investors like you and me. 2. Predictably, the shareholders voted to file chapter 11. This has already happened. Given that it has happened, you want to give the company the best chance of making a recovery and returning value to shareholders. It makes sense to partially restore executive salaries with retention bonuses, so that you have leadership to keep the company afloat while restructuring. Note that most of these salaries would have been heavily impacted by the bankruptcy filing, in which options and RSU's (the majority of most exec salaries) are now nearly worthless. So you sign a retention bonus as soon as you know bankruptcy is inevitable. Don't hate the players, hate the game. As I tried to elucidate in this thread, the problem is not any immoral actors, but the power of corporate chapter 11 bankruptcy and the fact that creditors' do not get to vote on the likelihood of it being a better ROI for them. It's simpler to blame it on the evil greedy executives (which makes no sense in this case) or try to make all sorts of band-aid amendments to how you can give bonuses to executives during a bankruptcy, but that misses the core problem.

RockIslandLine 6y ago

"Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless)." So they quit, and the company goes bankrupt on a different timeline. Why should either society or shareholders accept new bonus declarations?

lend000 6y ago
If you read the whole comment, you will see we are probably in agreement. Corporate chapter 11 bankruptcy laws are too powerful, and shift too much power from creditors to shareholders, imo.
- Apocryphon 6y ago
  It still sounds immoral even if you read the rest of the comment.
  - lend000 6y ago
    Perhaps it would make more sense to you if the headline were phrased: "On eve of bankruptcy, US firms restore a fraction of executives' previous salaries with retention bonuses, now that their options and RSU's are worthless, which of course made up most of their salaries." But that doesn't sell clicks as well to people who already have their minds made up.
    - idolaspecus 6y ago
      I don't know about selling clicks in general but, for me, that headline is even more compelling. Corporate executives' salaries are canonically justified by the fact that they're tied to the success of the corporation. If executives get their millions even when their corporations tank, I see a serious problem.
      - invalidOrTaken 6y ago
        It's an interesting failure mode I've only recently started to see clearly---before bankruptcy, shareholders are comfortable, thinking, "w/e, if the company goes bankrupt, our management gets nothing." But they fail to realize that if the company does go bankrupt, or close to it, it will be hard to find a replacement for someone with that level of knowledge of the firm. So the initial implied threat is now toothless.

hedora 6y ago

I’ll do it for their old comp. It’s not like I’ll do any worse than they did.

giarc 6y ago
Exactly. It's a really optimistic (and in my opinion terrible) view to think that the people that ran the company into bankruptcy can steer it out if only they got paid a bit more money.

xkcd-sucks 6y ago

So they quit, and someone hungrier + lower on the ladder gets a chance to prove themselves by turning the company around, rewarded by staying in the position when it's cushy again.

lend000 6y ago
>So they quit I doubt most of the executives see themselves as personally responsible for the financial situations of their companies, especially during an unprecedented global economic shutdown. Not because they are any different from you or me or any of these other self righteous commenters, but because they are the same. If American culture were more like ancient samurai culture, perhaps they could commit seppuku to restore their honor. But I would prefer to restore proper incentives instead, and weaken the power of chapter 11 so this isn't a problem in the first place.
- computerphage 6y ago
  It wasn't unprecedented.
  - sgt-serverless 6y ago
    the pandemic may not have been, but the scale to which businesses were shutdown was.
- texasbigdata 6y ago
  Look at the Bain 2020 annual “private equity” report. Back of the envelope math, at 10x purchase price and 7x leverage, 10 to 15% of revenue goes to debt coverage costs and a 5% revenue decline triggers the bank covenants and causes a technical default. It’s the executives fault that happened? Maybe it is, but the capital structure and the operating team are separate and distinct things. It’s also important to consider, if the bank debt can’t convert to equity via a ch11, then overall availability of capital will sharply decrease. Which in turn hurts every business around.
mostlyghostly 6y ago

bpodgursky 6y ago

That's... insane. The point of chapter 11 is that the company does NOT liquidate. Most employees DO NOT LOSE THEIR JOBS. Liquidating a functioning but indebted company destroys any remaining value (there is huge value in the structure of a business -- it's not the sum of inventory and real estate). And most importantly... EVERY SINGLE EMPLOYEE LOSES THEIR JOB There is absolutely no societal value in forcing companies to sell themselves off piece by piece, and sending every employee onto the street. Let the shareholders get wiped out. But don't force the company to fold and collapse unless it's unavoidable!

lend000 6y ago
Companies generally don't file bankruptcy when they are "functioning but indebted." They file when they can't even afford to make their next (or past-due) debt payment, and no creditors will dare to lend any more to them. Don't you think creditors should have a say in whether a company should be allowed to delete some debt and try to become profitable again? If the company is deep in debt beyond its assets, but the creditor thinks the company is a truly valuable business, then it might vote for chapter 11 under certain terms. Otherwise, you are just enabling the bad incentives described in this thread, including rewarding the failed execs with retention bonuses. But as I mentioned in the parent, these bankruptcies do not have a high percentage of success stories, and there are many repeat offenders who take advantage of the system. Yes, people at the failed company will have to find new jobs. That is called structural unemployment, and it is a normal part of progress.
- Ghex 6y ago
  > Don't you think creditors should have a say in whether a company should be allowed to delete some debt and try to become profitable again? Creditors already do have a say don't they? At the moment of filing, director's fiduciary duties expand to residual claimants in addition to shareholders. In addition, creditors have paths to reclaim fraudulent transfers (bonuses included) in court although it is a hard case to win. Creditors can also ask the court to convert to Chapter 7, but this is almost always in no one's best interest (shareholders wiped out, junior creditors wiped out, senior creditors will probably lose a non trivial amount, everyone loses a job).

II2II 6y ago

> Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless). Why not? These executives are paid considerably more than rank-and-file employees under normal circumstances, yet still manage to get bonuses when things turn sour. In contrast, that rank-and-file will be expected to take a pay cut, work more, or lose their livelihood. It flies in the face of the traditional reasons given for the high pay of executives: this has nothing to do with how much value any given person contributes, since everyone is expected to contribute more while a certain population is expected to receive a smaller share; this has nothing to do with the burden of risk, since the people taking the greater risk are the ones who are paid least (in terms of employees) or are taking the brunt of the losses (in terms of investors). So yes, it is immoral.

lend000 6y ago
> So yes, it is immoral. Who did the immoral thing here? The executives don't set their own pay, and didn't necessarily ask for a bonus. What, you would decline the bonus and step down to restore your honor in their position? Doubtful. Meanwhile, the shareholders are giving bonuses which likely result in lower overall comps for these executives, after taking into account that the RSU's and options in their comp packages become nearly worthless. This is done to keep the company operating smoothly during restructuring. Also, read the rest of the thread to get a better understanding of the mechanics before casting judgment. At every step of this process, the relevant decision makers made the rational and moral choice to arrive at this situation, as dictated by the US corporate bankruptcy system.
- User23 6y ago
  While technically the board of directors sets executive compensation, one must remember that those board members are largely executives at other companies and the executives are often board members elsewhere. So in practice it’s a circlejerk and executives do set their own compensation via implicit quid pro quo. Also, you appear to be confusing morality with legality. Screwing over line employees up to and including looting the pension funds to pay executive bonuses is legal (see Hostess bankruptcy for an example), but it’s also immoral.

Spartan-S63 6y ago

That's a good point. It would be interesting to get rid of Chapter 11 bankruptcy laws and force Chapter 7 instead. After all, it's shareholders that push companies to seek short term gains rather than long term trends, so when the company goes belly up, shareholders should be left holding that bag.

texasbigdata 6y ago
This would cause unreal job losses. Why in the world would you burn down a house just because someone bought it at too high of a price and now can’t afford the mortgage? How is that societally beneficial?
- luckylion 6y ago
  On the other hand, it frees up resources and market share for companies that have better policies and are looking beyond a 30 day time frame. And it's not like the house would burn down. The assets wouldn't go poof, they'd be auctioned off. The employees will lose their jobs, but then again, a competitor will be hiring because they will have more business, unless there is no market for the offered product at all. And if there's no market at all, then why would we want to spend resources to run a company serving it? An expensive real-life Company Simulator 2000?
  - Spartan-S63 6y ago
    Exactly. We should be encouraging policies that flush out value-less companies. The financial markets can't be the winners of capitalism. The consumers have to be the winners of capitalism and the only way you do that is by finding ways to make money change hands more rapidly and making markets more perfectly competitive.
- kelnos 6y ago
  And how does the current system not cause huge job losses? The people who stand the most to lose when they lose their jobs still end up losing their jobs, either way. The people who are remaining at the company after the layoffs are -- if the layoffs are done right -- the most valuable people, who would have the least trouble finding a new job if the restructuring fails.

gethoht 6y ago

So executives reap massive gains during both profits and losses. They literally cannot lose. Yet somehow this is moral while millions get laid off and are tasked with "pulling themselves up by their bootstraps" because capitalism... Capitalism in its current form has no morals at all.

texasbigdata 6y ago

This is patently false. 11s work. You know know how you can prove it? There’s less than a handful of chapter 22s (11, followed by an 11). Fundamentally it’s better for society for capital structure participants to get wiped out, including most non-wage perpetuation liabilities than for the company to just die. Greenspan wrote a sweeping history of American capitalism over 3 centuries (great book) and his belief was that American bankruptcy was one of the greatest contributors to long term economics growth. which is what roughly drives American average wellbeing (give or take). Sorry but just not true.

lend000 6y ago
You'll need a source for your aggressive claims -- these suggest that chapter 11 recidivism isn't that rare ("less than a handful" is patently false) [0][1]. And I wouldn't go so far as to abolish it, but to give debtors a stronger vote in the proceedings. Right now, the balance of power strongly favors shareholders, socializing the losses amongst creditors and prolonging the demise of companies that have no future (e.g. JC Penney). [0] https://blogs.harvard.edu/bankruptcyroundtable/tag/chapter-22/ https://blogs.harvard.edu/bankruptcyroundtable/tag/chapter-2... [1] https://www.reuters.com/article/us-bankruptcy-repeats/companies-turn-to-bankruptcy-again-and-again-idUSTRE8251N120120307 https://www.reuters.com/article/us-bankruptcy-repeats/compan...
- texasbigdata 6y ago
  Less than 1%. # of 22s (1) / total cases (2). To your following point, that’s not how bankruptcy works. Creditors can credit bid, creditors can hand together and push a company into involuntary bankruptcy (not common), creditors have a tremendous amount of remedies whereas shareholders do not. It would be a super long discussion really chopping this up, as to why, however look up recovery rates for different assets and/or market prices for various liquid (aka tradeable) assets after a company files for bankruptcy. You will find the higher up the capital structure the security (aka secured debt, followed by unsecured debt, followed by equity) the higher the price/recovery/expected value. The link you sent was interesting though. Thanks for sharing. 1. https://www.uscourts.gov/statistics-reports/us-bankruptcy-courts-judicial-business-2017 https://www.uscourts.gov/statistics-reports/us-bankruptcy-co... 2. https://www.google.com/amp/s/www.sissonlawoffice.com/blog/filing-again-understanding-chapter-22-bankruptcy%3Fhs_amp%3Dtrue https://www.google.com/amp/s/www.sissonlawoffice.com/blog/fi... Quote: “ Radio Shack made the news in 2017 when it filed for Chapter 22. That second Chapter 11 came only two years after it underwent a restructuring in 2015. Instead of opting to continue the business, its owner, General Wireless Operations, chose to liquidate all the remaining retail outlets.” ....seems pretty rare to me.

JKCalhoun 6y ago

> While it looks immoral if you don't understand the mechanics, people are simply responding to incentives around bankruptcy laws. Still looks immoral.

dehrmann 6y ago

> Nobody wants to try to turn around a bankrupt company at their old salary I'll take it a step further. Even in Chapter 7, you want to retain certain key people so debt holders can get the best return. Sale of assets and negotiating debt won't go as smoothly without those people, and the process could be tied up in bankruptcy court for years. It's a job only specific people would do well it, and it's a job no one wants, hence the high pay.

kelnos 6y ago
This really just perpetuates the attitude that the only thing that matters is finance, and all the workers can just go pound sand.
- scarface74 6y ago
  It is. The only purpose of a business is to make money. If workers are so hurt by being laid off, that’s not the fault of corporations acting rationally. That’s the fault of our system where the government doesn’t have an adequate social safety net in place. We should stop expecting corporate America to be responsible for “taking care of their employees”. There job should be to focus on profits and pay taxes to support social programs.
  - dehrmann 6y ago
    > The only purpose of a business is to make money. It's also the only reason workers show up.
- koheripbal 6y ago
  Any worker that had stock options comp and is needed for the bankruptcy process will get similar good deals. Who told you companies weren't about making money? That's literally the point of them.
- dehrmann 6y ago
  I'm a proponent of balancing shareholder, employee, and customer interests, but we're talking about bankrupt companies; those workers are losing their jobs regardless. You're paying the finance team to hang around so employees get their last paychecks rather than lining up as creditors in the bankruptcy court.

monadic2 6y ago

Lots of immorality is individually incentivized and legal. This doesn’t make it moral. I’m just confused why you bring it up when you’re clearly making a material argument for political change—of course this is immoral! That should be the impetus for the change.

fred_is_fred 6y ago

Maybe, just maybe, the same executives that lead into bankruptcy aren't the right ones to lead out of bankruptcy - and should not be rewarded for failure?

chooseaname 6y ago

Bonuses should reflect success. Succeed at keeping the company afloat until sold? Bonus. Succeed in turning company around? Bonus. Nothing before.