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For executives, big bonuses are bankruptcy's creamy filling.
Last week, a federal judge gave Hostess the go-ahead to hand out $1.8 million in bonuses to executives involved in liquidating the company. That seems gross enough, until you realize that it's common practice for companies in or about to enter bankruptcy to hand out big bonuses:
More than 1,600 insiders—executives and others controlling a company—received bonuses, salaries, fees and other compensation totaling more than $1.3 billion in the months before their companies filed for Chapter 11, according to a Wall Street Journal analysis of more than 80 bankruptcy cases over the past five years.
Because there are rules limiting bonuses for executives during bankruptcy, companies often hand out the bonuses shortly before filing:
Blockbuster Inc. paid collective bonuses totaling roughly $775,000 to a dozen top executives and managers one week before its September 2010 bankruptcy filing, according to a banker and a consultant familiar with the plan. The timing was an effort to avoid scrutiny under the bankruptcy law limiting retention plans, they said.
But don't worry—Blockbuster's general counsel, who received $100,000, described the bonuses as "relatively small."
Other companies ties bonuses to performance measures, as Hostess did to gain the judge's approval. But that's performance during the bankruptcy—you couldn't make the company a success, but nice bankruptcy, so here's a relatively small giant pile of cash. One rationale for such bonuses is to keep executives around through the bankruptcy, when it would be difficult to hire replacements if they left. Being offered a bonus to stick around because you're likely to have so many great job offers despite having had a leading role in a failing company is quite a different experience from that of rank-and-file workers who face unemployment when their companies go bankrupt, isn't it?