News of exorbitant executive compensation, even in the face of bankruptcy, has become almost the dog-bites-man story of the business section. Last year, the former CEO of AMR, parent company of American Airlines, received a $17 million severance package after leading the company through bankruptcy. When Hostess filed for Chapter 11, it asked a judge to approve bonuses for executives worth nearly $2 million. And last month Energy Future Holdings, the state’s largest power company, received approval from a bankruptcy judge in Delaware to award a bonus plan that could pay out as much as $20 million to its top executives.
These huge payouts appear to be de rigeur these days, but this announcement from EFH still elicited a small gasp from the gallery of people who notice such things. The U.S. Trustee assigned to this case objected to the plan, calling the bonuses “pay-to-stay” rewards—a bonus simply to get the executives to stick around during the bankruptcy. That’s a no-no under a 2005 federal law that prohibits bankrupt companies from offering hefty severance or retention payments for executives. (Congress passed the law after a number of executives, billing themselves as “turnaround experts,” received millions in payouts often for staying at a company for just a few months after it filed for bankruptcy.)
For its part, EFH, which use to be known as TXU, said the bonuses for the 26 executives will be awarded only if they meet stringent performance goals. In arguing for the payments, it noted that EFH is “one of the best operated companies in the industry.” If the payments are real performance rewards, rather than simply enticements to keep executives from leaving for a solvent company, then they are permissible under bankruptcy laws.
Bonuses in bankruptcy are always controversial. They create the appearance that the company is siphoning off creditors’ money to reward failure. In this case, though, EFH’s creditors, who are battling over plans to restructure the company’s $42 billion in debt from its 2007 leveraged buyout—the biggest in history—have been mum on the issue. This silence is telling. EFH’s bankruptcy is all about debt, the result of a poorly timed buyout that proved to be one of the worst bets on natural gas prices in history of fossil fuels.
And it’s worth noting that the company’s operations have kept humming along. In the five years leading up to the bankruptcy, the company beefed up investment in its operations by a whopping $10 billion and expanded its employee ranks by 25 percent, or about 1,900 jobs, a company spokesman noted at the time.
Creditors, in other words, are probably happy to reward the executives who have managed to keep maintain the company’s operations during the bankruptcy ordeal. The more cash the company has on hand from its day-to-day business, the more flexibility is has in reorganizing its debt and the bigger the return creditors are likely to receive.
There is, of course, a moral question about paying executives who, for whatever reason, couldn’t keep a company from going bankrupt. But EFH’s problems stem from the bad decisions of its owners rather than its executives. In cleaning up the mess, rewarding those who’ve managed to keep the lights on—and indeed burning brightly—during the bankruptcy may actually make some sense.