CEOs Are Cutting Millions of Jobs Yet Keep Bonuses

As the COVID-19 pandemic reached the U.S. in early March, millions of American workers were furloughed or laid off, leaving many without a reliable income. (Kathryn Vasel, CNN Business). Unemployment in the U.S. rose to 17.8 million in June 2020, an almost 8% increase since February. (The Employment Situation, U.S. Dept. of Labor). Economists estimate unemployment could reach 32.1% in the second quarter of 2020, surpassing the Great Depression’s 24.9% peak. (Chris Morris, Fortune). Despite thousands of American workers struggling to pay their bills, Chief Executive Officers (“CEOs”) remain largely untouched. (Anders Melin, Bloomberg Law). Though many executives have gallantly taken pay cuts to support employees, in the big picture, these cuts function as little more than a morale-boosting gesture. Id. To put this into context, Tenet Healthcare Corporation’s CEO announced he would forgo three months’ pay to support an employee emergency fund, amounting to approximately $390,000. Id. In reality, this six-figure salary cut is a mere 2% of what Tenet’s CEO received last year. Id. Additionally, CEOs forgoing their salaries entirely, such as executives from Lyft, Airbnb, and Disney, does not necessarily mean they have forgone bonuses and stock awards, which are often worth millions. (Libertina Brandt, Business Insider).

Even more shocking, one in every three companies that filed for bankruptcy protection due to the pandemic still awarded senior executives bonuses, essentially rewarding them for failure while firing lower-level employees. (Mike Spector, Jessica DiNapoli, Reuters). For example, Hi-Crush Inc filed for bankruptcy on July 12, 2020, but paid executive bonuses only two days prior. Id. For many companies, the pandemic is used to justify both bankruptcy and bonuses, citing the added “challenges executives faced” from the pandemic as justification. Id.

This very issue was already litigated in 2005, leading Congress to reform Section 503 of the U.S. Bankruptcy Code so Chapter 11 firms were no longer permitted to pay out executives’ retention bonuses. (In re U.S. Airways Inc., 329 B.R. 793, 797 (Bankr. E.D. Va. 2005)). Retention bonuses that compensate executives for merely staying with the company during the bankruptcy process, now cited as “business challenges”, allowed executives to reap benefits and ignore mass job cuts. (Jared A. Ellias, Regulating Bankruptcy Bonuses, 92 S. CAL. L. REV. 653, 658-61 n.4 (2019)); (Sahid Fawaz, Labor 411). However, firms recently found a loophole to the 2005 reforms if they approve bonuses in the months immediately preceding filing. (Spector, DiNapoli, Reuters). For example, eight separate COVID-19 induced bankrupt companies awarded bonuses only five days before filing. Id.

J.C. Penny, retail giant and the sixth biggest COVID-19 bankruptcy by assets, furloughed 78,000 of its 85,000 employees, permanently laid off 1,000 employees, and closed 152 of its stores across the nation due to the pandemic. (Spector, DiNapoli, Reuters). However, the retailer was able to award nearly $10 million in bonuses just before filing for bankruptcy on May 15, 2020. Id.; (Lucinda, Shen, Fortune). Similarly, luxury retailer Neiman Marcus Group furloughed 11,000 employees while paying the company's Chairman and CEO a $4 million bonus three months before filing for bankruptcy on May 7. (Spector, DiNapoli, Reuters).

The recent surge in bankruptcy filings amid record-breaking pandemic layoffs may force Congress’ legislative hand once again, but for now, bankruptcy judges and unsecured creditors are the frontline defense for preventing corporate malfeasance. (92 S. CAL. L. REV. 653, 662-63 n.33 (2019)). By its nature, bankruptcy law self-regulates, appointing the firm’s creditors to oversee management’s business decisions that will directly affect the creditors’ overall final payout. (See In re W. Pac. Airlines, Inc., 219 B.R. 575, 578 (D. Colo. 1998) ("[A] creditors committee serves something of a ‘watchdog’ function in bankruptcy and enjoys unique rights and responsibilities under the Code")).

In January, just prior to the onset of the COVID-19 crisis, the government reported the overall incomes of the bottom fifth of the population rose by 34% while the top fifth rose by 58%. (Steve Inskeep, NPR). Approximately seven months later, mid-pandemic, one can assume the already-startling inequality gap only worsened, particularly given COVID-19’s disproportionate effect on blue-collar workers. (Morris, Fortune). While professional service workers transitioned to work from home with minimal disruptions, approximately 100 to 120 million blue-collar workers experienced job insecurity or recent unemployment. (Sanghamitra Kar, Aditi Shrivastava, The Economic Times). Nearly ten years since the Occupy Wall Street movement and twelve years since the Great Recession, America’s rich continue to get richer. (Steve Inskeep, NPR). For the executives, one would never guess the country is operating amidst a global pandemic and looming economic crisis.