Eli5: How do CEOs from failing companies bail out with golden parachutes? Where does the money come from?
In: Economics
I believe OP is mistaken in their premise. Truly failing (bankrupt) companies don’t pay departing executives big bonuses. And if they try, the bankruptcy courts routinely claws back those payments in favor of other priority obligations owed by the company. Judges don’t look kindly on pre-bankruptcy payments to departing executives and have the authority to retrieve every nickel, even for sneaky payments made a year prior.
Once the bankruptcy filing is made, retention bonuses can be put into place for certain existing or new executives who are being asked to stay through the bankruptcy process as its presumed they have knowledge of value to the remaining enterprise and can help the company successfully emerge from bankruptcy. These are called post-petition agreements.
And the bonus money comes from the limited amount of cash the company has on hand prior to bankruptcy — usually including money they “saved” by not paying some of their bills as well as other funds used for continuing operations.
It’s a racket for the workout firms who manage the filings and represent the company in the courts, but not the one most people think.
I hope this helps.
Latest Answers