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Bill introduced in Congress to end executive bonuses in bankruptcy

A view of Capitol Hill in Washington August 1, 2011. REUTERS/Joshua Roberts

  • Execs making over $250,000 per year would be barred from bonuses
  • Bill follows report of $165 million in bonuses paid before Chapter 11

(Reuters) – A Democratic Congresswoman from Illinois has introduced a bill in the U.S. House of Representatives to end bonuses awarded both before and during bankruptcies for executives who make more than $250,000 per year.

Representative Cheri Bustos, who was joined by Tennessee Republican Representative Tim Burchett in sponsoring the bill, said in an interview with Reuters that the legislation introduced Tuesday is intended to prevent top officers from taking home additional compensation while lower-level employees are laid off as a result of the bankruptcy.

“It’s about fairness and it’s about looking out for those workers and making sure that those at the very top don’t get a bonus for basically working at a company that’s filed (for)bankruptcy,” she said.

Bustos originally introduced the bill, the No Bonuses in Bankruptcy Act, in 2019 and is revamping it now following a report from the Government Accountability Office that found in fiscal year 2020, $165 million in bonuses were paid to 223 executives across 42 companies shortly before they filed for bankruptcy. The report, which she commissioned, also found $207 million in incentive bonuses were authorized for 309 executives across 47 companies during their bankruptcies.

Hertz Global Holdings Inc made headlines last year by shelling out $16 million in bonuses days before it sought Chapter 11 protection. Other recent high-profile bankruptcies, including Purdue Pharma’s, have secured court approval for executive incentive plans worth millions of dollars during their bankruptcies as well.

In Chapter 11 cases, executives are generally not permitted to receive retention bonuses but can be awarded incentive bonuses. To obtain court approval of incentive bonus plans, the companies must convince the judge overseeing the case that the executives will have to meet certain goals to enhance the company’s restructuring process.

In addition to blocking executives making more than $250,000 per year from receiving bonuses during their company’s bankruptcy, the bill would allow the U.S. Department of Justice’s bankruptcy watchdog, the U.S. Trustee, to claw back bonuses paid in the six months before the bankruptcy was filed if the bonus would not have been allowed during the case.

When initially introduced in 2019, the bill had 14 co-sponsors, including Burchett.

Earlier this year, Representative Greg Steube, a Republican from Florida, introduced a similar bill that would bar payment of executive bonuses before a bankruptcy. Separately, bills in the House and U.S. Senate aimed at curbing certain corporate bankruptcy practices on a broader level, including legal protections for a bankrupt company’s officers and directors, have also been proposed.

Proponents of these types of executive bonuses have argued that they are necessary to keep management with institutional knowledge from leaving the company during a bankruptcy. They say the executives are essential to ensuring a successful restructuring. But Bustos said they shouldn’t be rewarded if their companies have been placed in bankruptcy.

“We ought to make sure that whether you have led that company into bankruptcy, whether you are now at the C-suite and that company has filed for bankruptcy, that you should not be allowed to be getting these bonuses,” she said.

Read more:

Warren, Cornyn introduce bill to block judge-shopping in bankruptcy

With diminishing pushback, executive bonuses in bankruptcy veer toward ‘entitlement’

On eve of bankruptcy, U.S. firms shower execs with bonuses

Maria Chutchian

Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

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