On eve of bankruptcy, US firms shower executives with bonuses • Hacker News Board

Re: On eve of bankruptcy, US firms shower executives with bonuses

#41

Post by bradleyjg » Sat, Jul 18, 2020, 12:37 AM UTC

nickff wrote: post #19

ipnon wrote: post #7

Is there any research claiming that giant executive bonuses, in this case seemingly at the expense of the company they govern, is optimal for some macroeconomic quality that benefits the society at large? Or do we allow this behavior because we believe it is immoral to prevent giant executive bonuses as a matter of principle?

There is evidence in both directions, but the data isn't great, because one of the reasons that boards offer large bonuses is to attract 'talent' to troubled or stagnant companies (which don't look great on the resume). Jim Collins (author of "Good to Great") has made the case that other factors are much more important. The other thing to keep in mind is that the 'huge' bonuses usually aren't very large from an incom…

> As to why this is allowed, I think it's seen as a private transaction between well-informed and consenting parties, so there needs to be a compelling reason for legislation and regulation.

In this specific case (zone of bankruptcy) there are externalities so it’s not a purely private transaction. For that matter limited liability always creates the possibility of an externality and so creates a hook for government regulation.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#42

Post by Apocryphon » Sat, Jul 18, 2020, 12:37 AM UTC

lend000 wrote: post #38

RockIslandLine wrote: post #36

Earlier quoted context omitted.

"Nobody wants to try to turn around a bankrupt company at their old salary (with their old RSU's and options now worthless)." So they quit, and the company goes bankrupt on a different timeline. Why should either society or shareholders accept new bonus declarations?

If you read the whole comment, you will see we are probably in agreement. Corporate chapter 11 bankruptcy laws are too powerful, and shift too much power from creditors to shareholders, imo.

It still sounds immoral even if you read the rest of the comment.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#43

Post by nickff » Sat, Jul 18, 2020, 12:42 AM UTC

bradleyjg wrote: post #41

nickff wrote: post #19

Earlier quoted context omitted.

There is evidence in both directions, but the data isn't great, because one of the reasons that boards offer large bonuses is to attract 'talent' to troubled or stagnant companies (which don't look great on the resume). Jim Collins (author of "Good to Great") has made the case that other factors are much more important. The other thing to keep in mind is that the 'huge' bonuses usually aren't very large from an incom…

> As to why this is allowed, I think it's seen as a private transaction between well-informed and consenting parties, so there needs to be a compelling reason for legislation and regulation. In this specific case (zone of bankruptcy) there are externalities so it’s not a purely private transaction. For that matter limited liability always creates the possibility of an externality and so creates a hook for government…

Employees are already treated as unsecured creditors in the bankruptcy process (unless you're the UAW), and I think lawmakers are reluctant to meddle with employment contracts in a situation which is already quite complicated.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#44

Post by JoeCortopassi » Sat, Jul 18, 2020, 12:44 AM UTC

Of course they do.

How else do you get people to stick around on a sinking ship? You and I wouldn't stay out of some sense of altruism, why would they? Heck, tech companies have to vest stock options over 4 years because most people would take the money and run.

What does everyone think happens when everybody quits because there's no reason to work there? The money is just returned to investors? Even if that's all you did, you still need people who...

    - know where the money is
    - how to distribute it
    - how to stay compliant with the law
    - how to make sure oversight is in place so that people don't straight up embezzle
    - keep outside players away that would try and take equity

Why on earth would someone stick around for such a sucky job, if the reward for doing well is getting laid off because the company tanked. Of course you need to pay people to stick around

Re: On eve of bankruptcy, US firms shower executives with bonuses

#45

Post by Apocryphon » Sat, Jul 18, 2020, 12:44 AM UTC

ipnon wrote: post #13

adrr wrote: post #10

Earlier quoted context omitted.

You could argue the people responsible for the decisions that resulted in the company going bankrupt aren’t the good people.

It's legal to be a bad person in the United States. The government is purposely mute on the matter of the morals of its citizens. As a democracy, the principle that allows us to prevent this behavior, if we deem it unacceptable, is to codify it in law, and make the specific behavior illegal.

They could mean good/bad in terms of business acumen and competence, not morality.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#46

Post by abeppu » Sat, Jul 18, 2020, 12:46 AM UTC

> Hertz - which recently terminated more than 14,000 workers - paid senior executives bonuses of $1.5 million days before its May 22 bankruptcy, in part to recognize the uncertainty they faced from the pandemic’s impact on travel, the company said in a filing.

Compensate the C-suite for confronting uncertainty, but fire the workers.

This seems like another variant of "brutal capitalism for the poor, socialism for the rich". Normally we hear it for governments bailing out companies but not (normal) individuals, but here it's companies ensuring their highest paid remain well-paid and thousands of workers are fired.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#47

Post by lend000 » Sat, Jul 18, 2020, 12:46 AM UTC

Apocryphon wrote: post #42

lend000 wrote: post #38

Earlier quoted context omitted.

If you read the whole comment, you will see we are probably in agreement. Corporate chapter 11 bankruptcy laws are too powerful, and shift too much power from creditors to shareholders, imo.

It still sounds immoral even if you read the rest of the comment.

Perhaps it would make more sense to you if the headline were phrased: "On eve of bankruptcy, US firms restore a fraction of executives' previous salaries with retention bonuses, now that their options and RSU's are worthless, which of course made up most of their salaries." But that doesn't sell clicks as well to people who already have their minds made up.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#48

Post by thaumaturgy » Sat, Jul 18, 2020, 12:51 AM UTC

lend000 wrote: post #35

Groxx wrote: post #33

Earlier quoted context omitted.

It can be both bad and encouraged by incentives. Doesn't make it not-bad though.

Not in this case. That is the oversimplified emotional response you see in the comments, but it doesn't jive with reality. Let's say you are the COO of Hertz, making 300K salary and 1M in options. The shareholders vote for Chapter 11 and those options are now effectively worthless, so your income decreased by ~70%. Are you going to stick around and try to dig out the company without a retention bonus? Given that the…

> Are you going to stick around and try to dig out the company without a retention bonus?

No. You have a couple of times framed opposition to executive bonuses in these situations as "simple" and "emotional", while expressing an appreciation for "creative destruction". So, if an executive would rather leave than turn a company around while tightening their own belt -- especially given that some of these executives can be assumed to be at least partly responsible for the company's plight anyway -- then why not encourage them to leave, and open the door for a more creative, new executive?

Imagine if, instead of paying extortionate sums of cash to retain the architects of their destruction, large companies created an entirely new market for c-levels that wanted to specialize in turnarounds.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#49

Post by Retric » Sat, Jul 18, 2020, 1:03 AM UTC

lend000 wrote: post #35

Groxx wrote: post #33

Earlier quoted context omitted.

It can be both bad and encouraged by incentives. Doesn't make it not-bad though.

Not in this case. That is the oversimplified emotional response you see in the comments, but it doesn't jive with reality. Let's say you are the COO of Hertz, making 300K salary and 1M in options. The shareholders vote for Chapter 11 and those options are now effectively worthless, so your income decreased by ~70%. Are you going to stick around and try to dig out the company without a retention bonus? Given that the…

When executive leadership has utterly failed, it’s probably better to replace them. The fact that their “1M” in options is worthless is a net positive as it lets the company drop dead weight and save money.

Handing out bonuses for retention is simply looting the company rather than being part of any efficient long term strategy.

Re: On eve of bankruptcy, US firms shower executives with bonuses

#50

Post by harry8 » Sat, Jul 18, 2020, 1:12 AM UTC

lend000 wrote: post #35

Groxx wrote: post #33

Earlier quoted context omitted.

It can be both bad and encouraged by incentives. Doesn't make it not-bad though.

Not in this case. That is the oversimplified emotional response you see in the comments, but it doesn't jive with reality. Let's say you are the COO of Hertz, making 300K salary and 1M in options. The shareholders vote for Chapter 11 and those options are now effectively worthless, so your income decreased by ~70%. Are you going to stick around and try to dig out the company without a retention bonus? Given that the…

Remember the whole rationale for the options in the first place was so management had something at risk.

So they failed, abysmally, and the company is now in chapter 11. And what they had at risk was nothing. The company probably would have had superior managment if it had /no/ bonus scheme. The incentives between owners and managers are not aligned.

More to the point the owners are represented by agents (fund managers who vote etc) who deal with other agents of the owners (company managers) and the whole incentive alignment thing breaks down pretty badly. How to do it better? It's a difficult and complex problem that probably doesn't have an easy 3 sentence internet forum answer.

But here's a very partial observational one:

It's harder to do it worse than paying bonuses for destroying the wealth of the owners.