CEOs who receive bonuses because their companies are on the verge of bankruptcy have drawn the wrath of Congressmen who say the payouts are unfair to shareholders who can end up with nothing if a company goes bankrupt.
The Government Accountability Office recommends that Congress consider changing the Bankruptcy Act to clearly define the extent to which companies can provide bonuses before filing for bankruptcy. In a September 30 report, GAO found that of approximately 7,300 companies that filed for bankruptcy in 2020, 42 were granting board bonuses shortly before filing. The bonuses totaling around $ 165 million were between five months and two days prior to filing for bankruptcy.
While pre-bankruptcy bonuses were a minority among Chapter 11 bankruptcy cases in 2020, the GAO report raises the question of how many more corporate executives might try to take advantage of Key Employee Incentive Plans (KEIPs) when there are more severe economic downturn.
“Congress should consider changing the US bankruptcy law to clearly place bonuses that debtors pay to executives under the supervision of a bankruptcy judge shortly before filing for bankruptcy, and to identify factors that courts will consider in approving such bonuses should, ”wrote the GAO.
Senator Elizabeth Warren, D-Mass., Targeted former Genesis Healthcare Inc. CEO George Hager Jr. earlier this year, who reportedly received a $ 5.2 million “retention” bonus before he left the care services provider in January, even after more than 2,800 of its residents died of COVID-19 and despite leaving Genesis in financial distress, she said.