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Bankrupt companies gave $165 million in bonuses to top execs before going belly up last year

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Chuck E. Cheese, Hertz and J.C. Penney are three very different companies but share one thing in common: oddly timed executive bonuses before their corporate bankruptcy filings.

Each company gave its top executives a pay bonus last year just before declaring Chapter 11 bankruptcy. So did Neiman Marcus, as well as oil companies Whiting Petroleum and Chesapeake Energy. All told, 42 companies awarded millions of dollars in so-called "retention" bonuses in the days leading up to their bankruptcies, the Government Accountability Office, or GAO, found in a new report

"These companies paid bonuses totaling $165 million anywhere from five months to as little as two days before the company filed for bankruptcy," Michael Clements, the GAO's financial markets director, said in a GAO podcast discussing the report. 

The awarding of retention bonuses by dozens of companies ahead of Chapter 11 filings shows that the U.S. bankruptcy code needs fixing, experts told CBS MoneyWatch. The change perhaps involves amending a bankruptcy code rule that Congress passed about 15 years ago, they said. 

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In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which greatly limited debtor companies' ability to give out executive and worker retention bonuses without a bankruptcy judge's blessing. The bankruptcy rules, however, do not regulate what a company can do before it files for bankruptcy, said Gregory Germain, a bankruptcy expert and law professor at Syracuse University. 

Out of 7,300 companies that filed for bankruptcy last year, none asked for a judge's approval for retention bonuses, the GAO found. Instead, many gave the bonuses beforehand. 

Congress can fix this by passing a new rule, Germain said.

"If they want to stop the process of awarding management for driving the company into bankruptcy, they really need to make it before and after bankruptcy," he said. "Otherwise, all you're doing is creating an incentive to pay the compensation before bankruptcy."

The GAO interviewed bankruptcy attorneys as part of its 34-page report, which was released last week. In it, attorneys said the bankruptcy abuse act is "less-than-effective" because companies have found a way to work around it. Giving retention bonuses overall is problematic, they said, because it effectively reduces the amount of money a company could be paying toward its debt.

An excuse for financial stability 

Scrutiny behind retention bonuses comes as U.S. companies are filing for bankruptcy at a historically high clip. In 2020, amid the pandemic, 630 companies declared bankruptcy — the highest count since 2010, according to S&P Global. Companies are still filing for bankruptcy this year, but the data halfway through 2021 suggests the levels won't be as high as last year. 

Plummeting sales in 2020, caused by the coronavirus pandemic, led some of the nation's largest retailers to file for bankruptcy. But as stores closed and employees were furloughed or laid off, some CEOs received hefty bonuses

Hertz CEO Paul Stone received $700,000, Chuck E. Cheese CEO David McKillips got $1.3 million and J.C. Penney CEO Jill Soltau received $4.5 million — just to name a few.  

"Not necessary at all"

Companies grant these retention bonuses because they want the best possible executive available to manage the bankruptcy turnaround, said Jared Ellias, a corporate bankruptcy law expert and professor at the University of California at Hastings. In some instances, companies are fearful of losing top managers because "it could take six months to a year to hire someone new," Ellias said.

In regulatory filings, companies often argue that retention bonuses entice executives and other key employees to stay and repair what's ailing the firm.

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"That's an excuse," Germain said. "They'll say [the CEO] knows where the problems are and how to fix them, but whether that's true or not, nobody knows. In most cases, [the bonus] is not necessary at all. To some degree, the executives are taking advantage of a company with already serious problems." 

Chuck E. Cheese defended the bonuses it gave McKillips and 29 other employees, saying in a statement to CBS MoneyWatch that the company "took action to preserve business continuity."

"These actions were put in place to ensure we have the management expertise and dedication to best position the company, in this unprecedented environment, to meet the needs of our customers, employees and business partners," the company said. 

Hertz did not respond to requests for comment. 

J.C. Penney declined to comment but the company said in a regulatory filing last year that the bonus pay was designed to "retain and continue to motivate its named executive officers and other employees through the volatile and uncertain environment affecting the retail industry." 

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