On eve of bankruptcy, US firms shower executives with bonuses

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.

Handing out bonuses for retention is simply looting the company rather than being part of any efficient long term strategy.

So they failed, abysmally, and the company is now in chapter 11. And what they had at risk was nothing. The company probably would have had superior managment if it had /no/ bonus scheme. The incentives between owners and managers are not aligned.

More to the point the owners are represented by agents (fund managers who vote etc) who deal with other agents of the owners (company managers) and the whole incentive alignment thing breaks down pretty badly. How to do it better? It's a difficult and complex problem that probably doesn't have an easy 3 sentence internet forum answer.

But here's a very partial observational one:

It's harder to do it worse than paying bonuses for destroying the wealth of the owners.

I worked directly with one of these C people at Hertz in a previous job; even 300k is grossly overpaying. Good luck finding another castle of cards arrangement to get a C position anywhere.

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.

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.

The C level engineered an entire system where it's impossible for them to lose.

Corporations are legal and social entities. It's reasonable to consider what our laws and customs allow or encourage in an effort to nudge society towards a more just future.

On the other hand, very few businesses are the product of a small subset of its people. In many businesses, such as some of the businesses mentioned in this article, it isn't a question of whether those other people can afford to send their children to college. They already knew the answer to that question: they cannot. Instead, it is a question of whether they provide their family with the bare essentials.

I am not suggesting that executives should sacrifice themselves for the benefit of the company or other employees. What I am suggesting is that it is immoral to take more when others are given less. If you disagree with that, that's fine. Consider it an ideological difference. Yet it is also important to realize that there are people who would disagree with both of us, that those who have more also have an obligation to sacrifice more in a time of crisis.

- Working for a business in financial distress basically sucks.

without stats I gotta think your case is an outlier, and in many other companies having financial difficulties a senior marketing person might have more impact (although I think impact is generally supposed to be at a higher level than senior marketing)

Note-to-self: Stay away from vulture-minded execs.

Note-to-investors: Keep an eye on and go the extra mile in rooting out the vulture-minded execs in your companies, before shit hits the fan.

It's surprising until you start to think about it, at a certain size, many companies are very much at existential risk from a building fire.

That's perhaps reasonable for you, but business succession planning and disaster contingency planning is the job of the board and executive team. They made a choice to discount the possibility of a building fire taking out the business, and that's a failure they should be accountable for. Or, worse, they didn't make a choice, and didn't even think of that risk. And yet now they're being "rewarded" with a bonus so they'll stick around to fix their mistake after it's too late?

At the end of the day you have a company full of people, and you're going to lay most of them off. Given the financial distress the company is in, they're not going to get much of a severance package, especially since you "need" to throw much of the remaining money at the executive team to keep them around. And for what, really? So a bunch of high-paid executives can pat themselves on the back that they "heroically" brought a company back from the brink? That's little comfort to the people who got laid off and struggled to find a new job before their severance ran out.

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.

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!

Because more often than not they are friends with the board and the main shareholders.

Only because we have a system where every company - you know, controlled by execs, and a board made up of execs or former execs from other companies - tell this tale.

We have to stop pretending C-level and VP-level people are special rare unicorns that are the only people who could possibly do this very difficult work. That's bullshit.

It's a self-perpetuating club that keeps voting itself the majority of the pie and keeps telling the myth that, by golly, that's the way it has to be or they just can't keep good talent.

If the majority of companies stop showering these assholes with bonuses they'll fucking stay put and be happy to have a job like the rest of us when times are hard.

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?

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.

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-co... 2. 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.

There job should be to focus on profits and pay taxes to support social programs.

Who told you companies weren't about making money? That's literally the point of them.

But to explain-

In fantasy world the money going to bonuses could go to severance, but in reality that is a misuse of cash, in some cases illegal.

The owners are the only ones entitled to the cash in the business, well, after creditors are repaid. Reducing the debt owed to creditors is the function of bankruptcy.

Workers are not owners and they definitely are not creditors. Giving them severance could in fact be considered stealing.

Putting cash into keeping operations going to service debt- THAT is how the owner/creditor dynamic plays out.

And key employees- managers- without whom the business crank does not turn- they become MORE valuable. Hence, bonuses.

Is this moral? No. It isn't. I never said it was.

But the way to make it moral isn't to rant- which I didn't do- and make use of undefinable and wrong/inapplicable terms like "ruling class".

Neither "ruling" nor "class" has anything to do with these dynamics.

There are a very precisely defined set of roles and relationships here, enshrined in law, going back to tradition, for thousands of years.

The way to make it moral is to understand what an owner is, what a creditor is, how the law works, and then to define what morality means.

Does it mean that workers become creditors, that labor creates a debt? That might be one avenue to explore, from a moral universe perspective. But changes to one role will change the other roles, and what one person considers moral, others may not.

My experience is that most people who make claims of immorality do not understand ownership, a foundation principle upon which nearly all societies that have practiced philosophy and have attempted to define morality have been based on.

Forgive me but you cannot talk intelligently about morality if you do not understand ownership.

That's my point.

Cheers, best wishes.

I agree that "well, you drew the short straw in getting a pandemic" is a fair reason to explain an executive's failure socially, but I've never known investors to be this kind and charitable. In my experience investors want to extract value right now, and they're more than happy to chuck executives away if they think someone else could do better no matter what the underlying cause was.

Secondly, while this behavior is galling in the current context, it's hardly new. The 2005 law banning executive bonuses during bankruptcy wouldn't be put in place if it wasn't already a problem. Under the general case you laid out above, investors appear happy to hand out bonuses for executives that crashed the company after rolling a 3.

If you’ve ever worked in management you know the ramp up period to being effective is months, not days. In bankruptcy every day matters.

> "It's not as if there's a shortage of employees or execs to go around right now" I don't think that there not being a shortage of execs would help the company significantly, since the company wouldn't have much to offer to attract experienced people, and in any case doesn't have the time to wait for the new people to ramp up.

Again in my case, how many “other employees” are they going to find from the outside who have built a relationship with their largest client [1], built internal relationships with other employees to get things done, know they business domain, and have two years of experience at the company to know how to maintain the codebase? If I were that valuable and hard to replace as an IC, can you imagine trying to replace the customer service managers, salespeople and CxO’s?

[1] I was valuable enough that our largest client made a deal with the company that finally did acquire us for scraps signed a special contract that allowed them to hire me as a contractor and get access to all of the source code of the company while I was contracting.

You expect an employee to stick around to "take the lumps" voluntarily, for LESS compensation than they would get elsewhere?

The reality is that you just don't give a shit what happens to the company or the employee, so you're happy to see the whole thing fail.

...and that's 100% your baggage - don't subject the rest of the world to your emotional problems.

Still a fuzzy measure, but it would at least give them better incentives.

These people are spending their own money to turn the company around. Who the F is the State to tell them they are doing it wrong? Who the F are you to tell them to spend their own money differently?