LEGAL/ETHICAL CHALLENGE

Should Senior Executives Receive Bonuses for Navigating a Company through Bankruptcy?

Consider this reportage from The Wall Street Journal: “On the way to bankruptcy court, Lear Corporation, a car-parts supplier, closed 28 factories, cut more than 20,000 jobs, and wiped out shareholders. Still, Lear sought $20.6 million in bonuses for key executives and other employees, including an eventual payout of more than $5.4 million for then-chief executive Robert .”

The US Justice Department objected to these bonuses, arguing that they violated a federal law established in 2005. The goal of the law was to restrict companies from paying bonuses to executives before and during a bankruptcy process. However, a judge ruled that the bonuses were legal because they were tied to the individuals meeting specific earning milestones. A company spokesperson further commented that the bonuses were “customary” and “fully market competitive.” Lear has subsequently rebounded, adding 23,000 jobs since completing the bankruptcy process. The practice of giving bonuses to senior executives who navigate a company through bankruptcy is quite common. A study of 12 of the 100 biggest corporate bankruptcies by The Wall Street Journal revealed that CEOs from these firms were paid more than $350 million in various forms of compensation. “Over the past few years, fights have erupted during a handful of Chapter 11 bankruptcy cases,” the newspaper reported. “The central argument has been over whether companies are adhering to federal laws when giving their executives the extra pay.” While judicial decisions regarding this issue have been mixed, we want you to consider the ethics of paying executives large bonuses when “gutting” a company by laying off workers, closing plants, and eliminating health care and retirement benefits to retirees.⁹⁰

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