Judges Rejected Bonus Plans for Top Executives at Bankrupt Companies

by San Antonio Attorney

A U.S. judge disagreed to a plan that would pay millions of dollars in bonuses to Molycorp Inc.’s executives.  This happened two days after GT Advanced Technologies Inc. was disapproved of a similar plan.

Molycorp, which declared bankruptcy in June, explained that the bonus plan would make the executives’ goals tie in with those of its creditors and it would preserve the value of the miner’s business.

But U.S. Bankruptcy Judge Christopher Sontchi in Delaware ruled that some of the bonus objectives served as payments to the insiders for not leaving their positions.  He disparaged one objective as “file a report and hang around.”

The creditors of the mining company and the United Steelworkers union does not approve of the plan, which could have given away US$2.9 million to top executives.

Two days ago, Judge Henry Boroff in Springfield, Massachusetts, has rejected again the GT’s plan to provide US$2.2 million in bonuses to top executives.  He said the executives are seeking bonuses for performing their duties.

Big companies that went bankrupt often ask permission to pay for bonuses, but they can only be paid to insiders if the plan includes complicated targets, not to serve as retention payments.

RadioShack, for example, paid US$2.3 million bonuses to insiders after bankruptcy reorganization was approved by the court.  The company did not reveal the names of the executives being paid when it asked for approval for the incentives.  The payout was granted because a many stores made it through the bankruptcy.

Bankruptcy companies have said the incentive programs are essential in motivating and rewarding top experts when a crisis strikes. They often say they have to pay cash bonuses if the stock-based incentive plans become worthless because of the bankruptcy.  Boroff called that argument” insensitive” to stockholders.

Nevertheless, the plans are usually approved, especially when they are designed to win creditors’ support, something Molycorp didn’t have.

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