Regulating Bankruptcy Bonuses
50 Pages Posted: 3 Sep 2018 Last revised: 3 Jun 2020
Date Written: August 24, 2018
In 2005, the perception that wealthy executives were being rewarded for failure led Congress to ban Chapter 11 firms from paying retention bonuses to senior managers. Under the new law, debtors could still pay bonuses to executives – but only “incentive” bonuses triggered by accomplishing challenging performance goals that go beyond merely remaining employed. In this Article, I use newly collected data to examine how the reform changed bankruptcy practice. While relatively fewer firms use court-approved bonus plans after the reform, the overall level of executive compensation appears to be similar, perhaps because the new regime left large gaps that make it easy for firms to by-pass the 2005 law and pay managers without the judge’s permission. I argue the new law was undermined by institutional weaknesses in Chapter 11, as bankruptcy judges are poorly situated to analyze bonus plans and creditors have limited incentives to police executive compensation themselves.
Keywords: Bankruptcy; Executive Compensation; Chapter 11; Corporate Restructuring
JEL Classification: G30; G33; K22; G34
Suggested Citation: Suggested Citation