Bankrupt Logic

Illustration by Robert Neubecker

Let’s say you’re a top manager at a company that goes bankrupt. Should you expect horrible punishment from the cruel gods of the market? Or a hefty cash bonus?

Similar developments last week at two firms who have lately been working their way through bankruptcy proceedings would suggest the latter. One of the firms is Enron, whose troubles have received quite a bit of attention already. The other is Polaroid, which filed for Chapter 11 protection in October. Polaroid’s fall was not as surprising as Enron’s, since the camera company has been in trouble for a while, but it was still a landmark event, considering its proud history of innovation, not to mention its past place among the Nifty Fifty stocks of Wall Street’s late 1960s and early 1970s go-go period (it traded at 90 times earnings in 1972).

Neither company is very popular these days, and now both have been taking heat for handing out, or trying to hand out, millions of dollars to key insiders while simultaneously sacking thousands of rank-and-file employees. Why would the companies do this? Well, they explain, these “retention incentives” are part of a vital “employee retention plan.”

Let’s look at Enron first. Shortly before filing for bankruptcy, the company doled out $55 million in bonuses to 500 of its “key” employees in an effort to convince them not to bail out and take work elsewhere. It’s actually not all that unusual for such employees—typically high-ranking executives—to get these loyalty bribes. Often the reorganizing company gets approval to do so from the bankruptcy court, but Enron didn’t bother with that, and it has so far provided little information as to who got how much money and why.

There’s a case to be made for the need to compensate key employees, but I guess Enron found it easier not to make that case at all, and it’s extremely difficult to explain that decision away as anything other than a money-grab by insiders. At this point, the company seems to be pursuing a strategy of looking as shifty, untrustworthy, and arrogant as possible. In fact, I wouldn’t be particularly surprised to see CEO Kenneth Lay grow a thin mustache and start twirling it obsessively while answering questions with an evil laugh. Note to Enron honchos: You have already made yourselves public enemy No. 1 among citizen-shareholders, easily supplanting Henry Blodget, so you can stop behaving suspiciously. Now.

Anyway, in the absence of facts from the company, observers have noted that $55 million to 500 “critical” employees works out to $110,000 a person. The 4,000 people Enron laid off got flat severance deals of $4,500. (Mwa ha ha ha ha!) Enron’s creditors—who of course want to carve off a bigger piece of that $55 million for themselves, not for laid-off workers—are likely to challenge the maneuver.

We have a bit more detail—but only a bit—about the Polaroid scenario, because its managers have actually gone to the trouble of filing a petition to the bankruptcy court for approval of what it calls “stay bonuses.” The firm seeks to give 45 top executives these special bonuses in amounts of up to twice their salaries. Some would also be in a position to gain extra money if Polaroid (whole or in pieces) gets sold for more than $275 million (a not especially challenging target). The Boston Globe’s detailed report on all this notes that the actual names of those who would benefit and how much each would get will be provided “only to those who sign a confidentiality agreement.” The bonus payoffs could total $19 million.

The case for doling out financial rewards to the very same top managers who rode a firm into bankruptcy in the first place is that, should those folks leave, they would be impossible to replace, given that no one wants to work for a company in Chapter 11. And it’s reasonable to argue that a bankruptcy proceeding does, in fact, require having some executive types around who actually have some idea of how the company worked or was supposed to work.

But what that argument also implies is that these executives might have better opportunities elsewhere—opportunities so good that they must be paid way more than what they were “worth” when the firm was still a going concern to stay. Now consider Polaroid chairman Gary DiCamillo, who would reportedly be in a position to get the most generous stay bonus. When he took over Polaroid in 1995, it was making profits in the hundreds of millions of dollars. You can debate how much the decline to its current condition is his fault; but really, how many job offers is he fielding right now? Who’s lining up to hire this guy? At this point, isn’t he lucky that any company is willing to pay him at all? (Last year he made nearly $1 million in salary and bonus.) Does it really take a sweet deal to keep him on board?

In some cases, payouts like these can’t be prevented: An employee who really feels he or she is invaluable to a reorganization is always going to try to squeeze the maximum financial benefit from the situation. But the process of figuring out whether that employee is getting what’s deserved or a good deal more ought to be conducted as openly as possible. Polaroid is only pretending to do this with its petition, and of course Enron blatantly did the opposite, making its moves in a more or less explicit attempt to avoid scrutiny. It’s easy to understand why onlookers (not to mention burned shareholders and fired employees) are outraged to hear of top managers reaping a financial reward for helping cleaning up a mess they created. The least the firms could do is be straightforward about who’s getting those “retention incentives” and why they’re supposedly justified. Instead, these high-ranking captains of bankruptcy act almost as if they have something to be ashamed of. I wonder why.