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This isn’t the right math. Executive XYZ (say a CMO) commands $X00k in the open market. His/her comp is 25% cash / 75% equity. At bk, the existing equity holde

This isn’t the right math. Executive XYZ (say a CMO) commands $X00k in the open market. His/her comp is 25% cash / 75% equity. At bk, the existing equity holders get wiped out given the fulcrum security is lower in the capital structure. The options the company (the debtor, in this case) to emerge (aka retain jobs via an 11 vs wind down via a 7) are: 1) - do nothing. Exec leaves. Hiring new exec costs $X00k x (1+Y%) as its MUCH harder to recruit in BK. 2)- do nothing. Exec leaves. No new CMO. Company dies. 3)- pay incumbent exec something. So nominally it optically looks terrible. The executive above looks like he/she is double dipping PLUS they seem to be getting a wage increase when there’s a down turn, etc. But all-in.... it’s not that sweet of a deal.

rm445 6y ago
I'd like to describe, without advocating, an alternative model, not claiming it's better than the 'exec pay is at the market value' model but maybe worth thinking about. Even though it's clearly wrong in lots of ways, I think under the surface it drives a lot of people's thinking. You might call-it a lottery-winner model. If you took the view that company executives are jumped-up middle managers who find themselves in a position to screw the shareholders and other employees and drive their compensation into the stratosphere, then a given exec is like a lottery-winner, and not necessarily possessing employable skills that translate on the open market. Their pay would be structured something like {10% more than the layer below them, for the added senior responsibility} + {enormous multiples more, because they're in a position to take it}. Of course, skilled executives can and do find other similarly-well-paid positions. But this model works on the thinking of observers, and other people in the distressed organisation, in two ways. (1) Thinking of a company in distress as no longer being able to fund lottery-winners. (2) Thinking that such jobs could be filled on promoted-middle-manager sort of pay. As in, why wouldn't the financial controller take on the CFO role for a 10% or 20% (or 100%) pay rise? Why wouldn't an operations manager become CEO for 10% or 20% or 100% more? My take on this is that (1) is false, executive compensation is a small part of company finances and would particularly be small beans compared to the impact of turning a distressed company around. And (2) is... somewhat based in truth? I do think that growth in executive pay is in some sense wrestling value away that belongs to the owners of the capital. But shareholders and boards of companies in distress will always be looking for a miracle, it's a lousy time to be seen as settling for second-best or dealing with people at the top jumping ship.
kelnos 6y ago
If's funny. Exec compensation is often equity-heavy under the belief that, since their comp is tied to company performance, they'll be incentivized to do things that make the company perform. But then when the company fails to perform and the equity is wiped out, we've decided that the exec should get a bunch of money to compensate for the equity loss, even when that equity loss happens completely as a part of the design of the compensation structure in the first place!
- koheripbal 6y ago
  You misunderstand. By the time the company goes bankrupt, the exec has already lost 75% of their comp for several years, since vesting schedules are four years long. The bonuses they get at bankruptcy do not amount to that lost comp. They are only meant to convert what their expected normal comp was - ie replacing stock options with salary. So they have still lost money - lots of it.

rm445 6y ago

I'd like to describe, without advocating, an alternative model, not claiming it's better than the 'exec pay is at the market value' model but maybe worth thinking about. Even though it's clearly wrong in lots of ways, I think under the surface it drives a lot of people's thinking. You might call-it a lottery-winner model. If you took the view that company executives are jumped-up middle managers who find themselves in a position to screw the shareholders and other employees and drive their compensation into the stratosphere, then a given exec is like a lottery-winner, and not necessarily possessing employable skills that translate on the open market. Their pay would be structured something like {10% more than the layer below them, for the added senior responsibility} + {enormous multiples more, because they're in a position to take it}. Of course, skilled executives can and do find other similarly-well-paid positions. But this model works on the thinking of observers, and other people in the distressed organisation, in two ways. (1) Thinking of a company in distress as no longer being able to fund lottery-winners. (2) Thinking that such jobs could be filled on promoted-middle-manager sort of pay. As in, why wouldn't the financial controller take on the CFO role for a 10% or 20% (or 100%) pay rise? Why wouldn't an operations manager become CEO for 10% or 20% or 100% more? My take on this is that (1) is false, executive compensation is a small part of company finances and would particularly be small beans compared to the impact of turning a distressed company around. And (2) is... somewhat based in truth? I do think that growth in executive pay is in some sense wrestling value away that belongs to the owners of the capital. But shareholders and boards of companies in distress will always be looking for a miracle, it's a lousy time to be seen as settling for second-best or dealing with people at the top jumping ship.

kelnos 6y ago

If's funny. Exec compensation is often equity-heavy under the belief that, since their comp is tied to company performance, they'll be incentivized to do things that make the company perform. But then when the company fails to perform and the equity is wiped out, we've decided that the exec should get a bunch of money to compensate for the equity loss, even when that equity loss happens completely as a part of the design of the compensation structure in the first place!

koheripbal 6y ago
You misunderstand. By the time the company goes bankrupt, the exec has already lost 75% of their comp for several years, since vesting schedules are four years long. The bonuses they get at bankruptcy do not amount to that lost comp. They are only meant to convert what their expected normal comp was - ie replacing stock options with salary. So they have still lost money - lots of it.