Bankruptcy's Big Bonuses: Greed or Need?

By Rachel Beck
AP Business Writer
Wednesday, January 22, 2003; 5:30 AM

NEW YORK –– A company files for bankruptcy, thousands of workers lose their jobs and the stock price becomes nearly worthless. So what do its executives and managers do?

They ask for bonuses, sometimes worth millions of dollars.

Never mind cost-cutting in every other part of the business. Never mind tough economic times that make it less likely key employees will flee to other jobs.

Companies like United, Conseco and WorldCom want the money to ensure their key managers will stick around during their reorganizations.

Whether these retention bonuses are handed out is determined by a bankruptcy court judge, who generally has the interest of the company's creditors in mind when formulating a decision.

And creditors often say the bonuses are good money spent because they help stem the exodus of workers who know the business. The creditors' goal is to get a company back to health so they can recoup money loaned before business faltered.

In some cases, the bonuses do have an impact.

Some companies, for instance, want to make sure their sales teams stay intact. They want them to continue finding new business and helping existing clients, and they don't want them to jump to a competitor.

The same is true with the finance department. Companies want to keep people who understand the financial aspects of the business while navigating bankruptcy proceedings.

Also, the bonuses help retain staff when it might be hard to recruit new workers.

"The premise of giving people these bonuses is that their presence is more valuable than their departure," said David Gray Carlson, professor of law at the Benjamin N. Cardozo School of Law at Yeshiva University.

Often, though, these bonuses extend far beyond just key staff. They can include hundreds, even thousands of employees up and down the management ranks, many who aren't crucial to a company's operations.

And in an ironic twist, often those asking for and receiving bonuses are the same people who were the decision-makers when the company was crumbling.

"Why are we going pay these people big bonuses and expect them to turn a company around after it has filed for bankruptcy when they worked there before it filed?" said Bill Coleman, senior vice president for compensation at Salary.com in Wellesley, Mass.

In addition, in this weak economy, it's unlikely that top managers will have many other job opportunities to consider. The unemployment rate is now at 6 percent, with much of the job loss in management positions.

But that hasn't stopped companies from asking for big retention bonuses, which rank-and-file employees are quick to call unfair.

At United, the flight attendants union has filed a motion in U.S. Bankruptcy Court in Chicago arguing against the airline's request for a $20 million retention bonus plan covering more than 300 employees. That's on top of a $75 million severance plan that United wants for thousands of its key employees.

The flight attendants on average make $35,000 a year and have agreed to 9 percent wage cuts.

"It is about management profiting from a financial disaster at our airline on the backs of every front-line employee," said Sara Dela Cruz, spokeswoman for the Association of Flight Attendants. "This is really about the inequity of this situation."

At WorldCom, 325 key senior employees are getting $25 million in retention bonuses.

A court hearing is expected later this month on a $33 million retention bonus program for 575 employees at Conseco, the insurance and finance company that filed for bankruptcy last month.

In the Enron case last year, the Securities and Exchange Commission filed a motion against a plan to give nearly 1,700 Enron employees up to $140 million in bonuses and severance pay.

But a bankruptcy judge approved the request. He did, however, say he would closely analyze who got what and included a provision forbidding distribution of money to any employee convicted of a crime or who engaged in securities fraud.

Asking for retention bonuses may be perfectly legal under the law.

That doesn't mean that they are ethically right.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org