Bankruptcy bonuses first created a stench when Enron executives lined their pockets when their business collapsed. In 2005, Congress passed a law banning so-called retention bonuses paid to executives of bankrupt companies just to stay in office.
In response, troubled companies began to grant retention bonuses before filing for bankruptcy. They also began to describe the bonuses awarded during the Chapter 11 proceedings as “incentive bonuses”. Incentives are conditional on the achievement of performance goals, which are often easy to achieve.
For example, a key condition for Fairway executives to collect their $ 1 million in incentive bonuses was to sell the Upper West Side flagship store and certain others. An administrator from the US Department of Justice observed that this was not a difficult target as management entered into a sale agreement before filing for bankruptcy.
Howard Glickberg, longtime CEO of Fairway and one of the many parties owed money when the grocer went bankrupt, said Crain’s he was disgusted that executives demanded bonuses after mismanaging the business founded by his grandfather.
“They go against everything I stand for,” Glickberg said of the payments.
Fairway argued that the bonuses were necessary to motivate management to achieve the best possible results.
“We believe this is justified – more than justified – in the circumstances,” Fairway bankruptcy attorney Sunny Singh of Weil Gotshal & Manges told a judge, who promptly approved the payments.
“There is no place more hostile for a worker than a bankruptcy court,” Robert Newell, president of Local 1500 of the International Union of United Food and Commercial Workers, Recount Crain’s Last year.
GAO found that judges approved bankruptcy bonuses 97% of the time, and observed that payments “may not only increase the risk that executives will use their influence to improve their compensation at the expense of others, but also concerns about fairness when employees are made redundant and creditors suffer losses.
Rapoport said Congress must step in to level the playing field.
“Congress has already tried to solve this problem,” she said. “It did not work.”