A six-figure bonus for going bankrupt? Suuuure
If there's a little-known compensation practice that surely deserves more outrage, look no further than the "bankruptcy bonus."
Corporate executives have long sought to score financial bonuses in the midst of a company's bankruptcy, arguing that their skills in winding down a business or overseeing its restructuring is worth an extra payout. Although a 2005 federal law restricted "retention" bonuses paid out to executives during a restructuring, many bankrupt companies have continued to pay out lucrative bonuses to top managers while cutting staff and closing offices.
The most recent example is Sports Authority, a sporting goods retailer that filed for bankruptcy protection in March. The company had hoped to keep some of its stores open, but ultimately closed its final stores in July.
At the same time, Sports Authority wanted to pay four executives a combined $2.85 million in bonuses, arguing that the extra payments were necessary to make sure that the managers stuck to a budget and minimized waste, according to Reuters. The company didn't reveal the managers' names, saying that it wanted to "minimize detrimental impacts on employee morale."
"I think it's just inappropriate to pay senior executives a bonus when all the employees are losing their jobs," said Judge Mary Walrath of the U.S. bankruptcy court in Delaware during a hearing when she denied the request, according to Reuters. She added that she wasn't surprised that employees had been writing angry emails about the requested bonuses.
About 14,000 workers at the company's 460 locations are losing their jobs in the bankruptcy.
Sports Authority had argued that the payments were legal because the bonuses would be paid by lenders, rather than the company, according to The Wall Street Journal. The publication added that Walrath replied, "Not so fast," and pointed out that laws exist about paying executives in a bankruptcy.
Despite the 2005 bankruptcy law, many companies find ways to reward their top executives during a bankruptcy restructuring. One such method? Incentive plans that pay top managers bonuses for reaching performance targets, including some that apply in case of a bankruptcy.
A 2012 study from The Wall Street Journal found that bankruptcy-related bonuses aren't uncommon. Executives at 21 companies that had recently filed for bankruptcy took home more than $350 million in salary, bonuses, stock grants and severance for the time just before or just after their company filed for Chapter 11, it found.
In one case, car-parts supplier Lear Corp. asked for $20.6 million in bonuses for top executives while going through bankruptcy, in which 28 factories were closed and 20,000 people lost their jobs, the Journal noted.