Bankruptcies Can Scotch Exec Pay Deals

With bankruptcies on the rise, executives need to be aware that their promised payouts, golden parachutes or severance packages could be at risk.

Consider the plight of former executives at bankrupt Circuit City, a mass electronics retailer. The firm filed for protection in Nov. 10 and its lawyers are asking a bankruptcy court not to continue to pay agreed-upon payments to some top former executives.
One is Philip J. Schoonover, who resigned as Circuit City's chairman, president and CEO in late September. When he departed he was due something like $1.8 million plus $50,000 in out placement services, health benefits for two years and various others awarded including accelerated vesting for stock options.

The $1.8 million in pay includes a $900,000 bonus for the fiscal year ending this coming February despite the fact that the firm's financial status continued to deteriorate dramatically under his leadership.

Another executive is James Wimmer, Jr., a 40-year employee who was laid off Nov. 7. He claims he is owed $433,509. Wimmer served as vice president of store services.

Circuit City's lawyers want to renege on both pay agreements, saying they shouldn't have to pay when they are bankrupt. Plus, the firm is trying to get out of some 44 service contracts with Google, and various hotels. Law professors say that the company has a good chance of getting its way in court.

This should be a stern warning to C-Suite types. In November alone, bankruptices rose to 91,355, a 36.9 percent increase over the month in the previous year. More than 1 million are expected by year-end making this the worst in three years. Wise executives whose firms may be in trouble might consult their lawyers or pay consultants.