new york times

These Companies Gave Their C.E.O.s Millions, Just Before Bankruptcy

Corporate boards are handing out millions to top executives before their companies seek bankruptcy protection, and courts can’t do much about it.

J.C. Penney and other companies that are struggling to pay creditors and suppliers are still finding ways to pay millions in bonuses to their bosses.
J.C. Penney and other companies that are struggling to pay creditors and suppliers are still finding ways to pay millions in bonuses to their bosses. Credit…Chang W. Lee/The New York Times 


The coronavirus recession is pushing many companies into bankruptcy, a painful process that has led to layoffs, wiped out some investors and hurt the economy.

But the chief executives of some of these businesses are doing just fine.


Companies that are struggling to pay creditors and suppliers are managing to find millions of dollars to pay bonuses to their bosses. The payments, which are made just before a bankruptcy filing, appear to be legal and have been made by several companies.

J.C. Penney, which is closing 154 stores, paid its chief executive, Jill Soltau, $4.5 million. The chief executive of Whiting Petroleum, which sought bankruptcy protection in April, received $6.4 million, and Chesapeake Energy is paying bonuses ahead of an expected bankruptcy filing. Executives at Hertz also got payments before the rental-car giant sought bankruptcy protection.

Companies have said the payments are meant to help them retain qualified executives through the recession and bankruptcy.

But critics counter that the money would be better spent on rank-and-file employees. “It makes me angry because they are not taking care of the people who are actually making the money,” said Liz Marin, who worked at Toys “R” Us when it filed for bankruptcy and is now an organizer in training at United for Respect, a nonprofit organization that seeks to help retail workers. Toys “R” Us paid bonuses to executives before its bankruptcy.

Jill Soltau, chief executive of J.C. Penney, received a $4.5 million bonus before the company’s bankruptcy filing.
Jill Soltau, chief executive of J.C. Penney, received a $4.5 million bonus before the company’s bankruptcy filing.Credit…Dylan Hollingsworth/Bloomberg

Chief executives who lead companies into bankruptcy are at risk of losing their jobs. Geisha Williams left Pacific Gas & Electric, the giant California utility, in January 2019, just before the company filed for bankruptcy protection, for example.

But other corporate boards, which hire the chief executive and set compensation for senior officers, seem to be showing more grace toward the boss. In many cases, the executives could do little to prevent the crushing falloff in business that occurred when the pandemic and lockdowns stopped people going into stores, eating out and taking trips. The drop in the oil price this year was unusually large, walloping many energy companies, though some, like Chesapeake, were already burdened with large debts.

Certain outlays that a company makes just before bankruptcy — for instance, payments to suppliers — are at risk of being clawed back. But the bonus payments typically don’t fall into that category, legal scholars say.

Typically, a company in bankruptcy court has to get a judge’s approval before doing just about anything of importance, especially spending millions of dollars. If a chief executive got a new compensation package during bankruptcy, a judge would have to decide whether the compensation was justified after hearing from creditors, shareholders and other groups. But this can be a drawn-out and expensive process — a big reason companies pay bonuses before bankruptcy.

In normal times, a large portion of executive compensation is paid out in stock-based awards that top officers earn over time. But the stock of a bankrupt company is most likely going to be wiped out or be worth little once a company resolves its bankruptcy or, in extreme cases, sells off its assets and goes out of business.

As a result, boards have quickly changed how top officers are paid, giving them cash bonuses instead of stock-based awards. But paying cash up front can be a windfall for chief executives when the livelihood of employees is under threat.

“The companies are creating certainty for their C.E.O.s at a time of the greatest uncertainty for the employee base and the company in general,” said Brett Miller, head of data solutions for the responsible-investment arm of Institutional Shareholder Services, which advises investors on corporate governance issues.

 Chesapeake Energy said the cash bonus for its chief executive, Robert D. Lawler, was less than the value of his 2019 incentive bonus. 
Chesapeake Energy said the cash bonus for its chief executive, Robert D. Lawler, was less than the value of his 2019 incentive bonus. Credit…Various

Some companies point out that their cash bonuses are smaller than the incentive-linked compensation previously awarded to executives. Chesapeake said in a filing that its chief executive, Robert D. Lawler, was eligible for a cash bonus 34 percent smaller than the $13.5 million at which his 2019 variable compensation was valued. Ms. Soltau of J.C. Penney got a $4.5 million cash bonus before the retailer declared bankruptcy, much lower than the $8.2 million at which her 2019 incentive-based awards were initially valued.

But some stock awards had slumped in value, as share prices of troubled companies plummeted, even before the pandemic took hold. Put another way, the cash bonuses may have enabled the executives to recover pay that they had most likely already lost, possibly for good.

Some companies don’t even try to argue that executive pay was cut. At $6.4 million, the cash bonus paid to Whiting Petroleum’s chief executive, Bradley J. Holly, is larger than the $5.5 million at which the company valued his total compensation for 2019.

And of course the bonuses are far higher than what regular employees earn. Ms. Soltau’s was many times the $11,482 the retailer’s median employee, a part-time worker, earned during J.C. Penney’s 2019 fiscal year, according to a securities filing.

The cash bonuses have also led to the concealing, loosening and removal of the tools companies normally use to tie pay to performance, which many critics contend were already too weak. Companies still operate when seeking protection under Chapter 11 of the bankruptcy code. And in theory, boards could require chief executives to hit sales targets or achieve other goals.

And in some cases, a few strings remain. Ms. Soltau has to repay a fifth of her cash bonus if she fails to achieve certain performance goals, and Mr. Lawler has to repay half of his. But J.C. Penney and Chesapeake did not disclose the goals in their securities filings and declined to answer questions about them.

Hertz and Whiting, the oil and gas company, did not tie cash bonuses to performance goals at all. Whiting and Mr. Holly didn’t respond to requests from comment, but the company said in a securities filing that the new bonuses “eliminate any potential misalignment of interests that would likely arise if existing performance metrics were retained and/or new performance metrics were established at a volatile and uncertain time.”

This is not the first time that executive pay at troubled companies has prompted an outcry. Congress passed a law in 2005 aimed at curbing retention bonuses paid during bankruptcy. Under the law, companies are allowed to pay incentive-based bonuses, but the legal cost of constructing such payments and getting them approved in bankruptcy court soared after 2005, according to research by Jared Ellias, a professor at the University of California’s Hastings College of the Law.

Of course, Congress could change bankruptcy law so that compensation payments made before the filing could be clawed back, Mr. Ellias said. In addition, lawmakers could make it easier for creditors to pursue claims against executives after the bankruptcy.

“This doesn’t feel right,” he said of the recent large bonuses, “and it doesn’t instill public confidence in the bankruptcy system.”