Why do execs get huge bonuses after running their companies into bankruptcy?

After getting “crushed by a mountain of debt” and declaring bankruptcy, Toys R Us execs are seeking approval for $16m in bonuses to pay themselves. WHY?

December 1, 2017

After getting “crushed by a mountain of debt” and declaring bankruptcy,  Toys R Us execs are seeking approval for $16m in bonuses to pay themselves.

According to the toy chain, this is “standard practice,” and sadly, they’re right: in the event of a corporate collapse, the businessmen at the top of the food chain are frequently awarded multi-million dollar payouts — all while the thousands of hard-working employees beneath them are laid off.

They’re called “bankruptcy bonuses”…

And they’re incredibly common. A WSJ study found that, over a 5 year period, 1.6k execs were rewarded with a collective $1.3B in bonuses — an average of more than $800k a piece — after running their companies into the ground.

Some of the more egregious cases in recent years:

  • After car-parts company Lear Corp. went broke, it paid out $20.6m in bonuses to a handful of top execs, while 20k employees were laid off.
  • Hostess cut its bakers’ salaries by 8% after filing for bankruptcy, but gave its execs raises of 60-100%, in addition to $1.75m in bonuses.
  • Circuit City paid out $2.3m in bonuses while cutting 39k jobs and liquidating their entire inventory.

And of course, let us not forget the titans of bankruptcy bonuses: the Wall Street execs who collectively raked in more than half a billion dollars after the 2008 financial crisis.

How is this legal?

A 2005 federal law restricts companies’ ability to pay execs bonuses during times of restructuring — but, as is often the case for rich folks, there are lots of ways to get around it.

Some companies give their execs “incentive plans” that reward them for hitting benchmarks, and in the fine print of these plans, they classify going through bankruptcy as a bonus-worthy occasion.

Which means, for executive teams, bankruptcies are not just an opportunity to restructure — but to cash in big.

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