Hertz Paid Out $16 Million in Bonuses, Days Before Bankruptcy
May 26 2020 - 4:48PM
Dow Jones News
By Alexander Gladstone
Hertz Global Holdings Inc. paid more than $16 million in
retention bonuses to senior managers, including its new chief
executive, just days before it filed for bankruptcy Friday
night.
The car-rental company said it agreed to pay a $700,000 bonus to
Chief Executive Paul Stone, who was named to the post this month.
Chief Financial Officer Jamere Jackson received $600,000 and Chief
Marketing Officer Jodi Allen got $189,633, according to a Tuesday
regulatory filing.
In all, Hertz said it would pay $16.2 million in cash bonuses to
about 340 employees in recognition of uncertainty the company and
its employees face as a result of the coronavirus pandemic's impact
on travel.
Hertz is the latest troubled company to make payments to top
executives before filing for bankruptcy. By paying bonuses before
filing, the companies don't need bankruptcy court approval.
In recent weeks a number of companies -- among them J.C. Penney
Co. and Whiting Petroleum Corp. -- have paid out bonuses to top
brass just before filing for chapter 11. Penney paid $10 million in
retention bonuses to top executives before filing. Whiting's top
five executives got board approval for $14.5 million in cash
payments, including $6.4 million for its chief executive. Another
oil company -- Chesapeake Energy Corp. -- that has been teetering
on the edge of bankruptcy said it would pay $25 million to a group
of senior executives.
Bankruptcy law bars retention payments to senior executives. In
the past 15 years, retention bonuses have been largely supplanted
in bankruptcy cases by key-employee incentive plans that tie
bankruptcy bonuses to earnings targets or to postbankruptcy
goals.
Jared Ellias, a law professor at the University of California,
Hastings School of Law, said that while the law prevents companies
in bankruptcy from paying such bonuses, companies are still able to
do so right before they file.
"The window is wide open," Mr. Ellias said. "It's regulatory
evasion, you know there's a regulation, so you do it another
way."
Proponents of such payments say they are needed to keep the best
executives from jumping ship when they are needed most. Detractors
say they are simply another way for top-level managers to enrich
themselves.
But with many businesses struggling to survive the coronavirus
pandemic -- Hertz's revenue in April fell 73% from a year earlier
-- incentive bonuses based on financial metrics are essentially out
of reach.
Brian Cumberland, an executive-compensation expert with Alvarez
& Marsal, said the case for companies to lock down key talent
with retention payments is stronger due to the pandemic, which has
upended business projections and has made it harder to construct
meaningful incentive targets.
"The reason you see the prepay be more compelling now is because
of the uncertainty about what would be the metrics that you would
put in place, " Mr. Cumberland said. Since 2016, more than 70
companies have prepaid retention bonuses before filing for
bankruptcy, according to Alvarez & Marsal.
One potential legal hurdle: Payments made to corporate insiders
within one year of a bankruptcy filing can potentially be clawed
back into the bankruptcy estate.
Still, while creditors can try to challenge the bonuses in
court, it is extremely rare, if not unheard of, for a judge to
grant creditors standing to sue on this charge as long as the
payment is made before the filing, Mr. Ellias said.
Hertz said plummeting used-car values and a frozen used-car
market were key elements in its decision to seek bankruptcy
protection. The company entered chapter 11 without a deal with
creditors and without a bankruptcy loan to fund its business.
The company, which has laid off about two-thirds of its 21,000
employees, has enough cash to fund operations at least through the
initial stage of the bankruptcy case, according to court
papers.
--Andrew Scurria contributed to this article.
Write to Alexander Gladstone at alexander.gladstone@wsj.com
(END) Dow Jones Newswires
May 26, 2020 16:33 ET (20:33 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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