Friday, April 12, 2013

Question: How Much Severance Should a CEO Get for Running His Company Into Bankruptcy?

$20 Million, Yeah That Seems Like a Fair Number

The recent election saw the issue of class warfare brought into the fray by Conservatives.  Their position was that anyone who challenged the idea that most if not all of the economic benefits of society should go to the wealthiest members of society were just envious and were engaging in class warfare.  They were offended, highly offended that anyone should question that the so-called “job creating class” should not have incomes in the tens of millions and tax breaks even higher.

What they failed to understand, most likely deliberately because it would destroy their position, is that most Americans do not resent the riches bestowed upon the business successes of the nation, even if they do think what those people get is a little too much.  What most Americans resent is the falsity of a system that is supposed to be built on the concept of rewarding the successful and economically punishing the failures, except it does not.

Now it is true that when a business enterprise fails, many people suffer.  The employees lose their jobs, their self respect and in some cases their savings and their retirement income.  Creditors usually suffer losses and stockholders may suffer a complete loss.  But the resentment comes from the fact that even in massive failure a very few top executives, the ones most responsible for that failure do very well indeed.

Such is the case with the CEO of bankrupt American Airlines.  There is an effort underway to pay him $20 million in severance.  Fortunately a Federal judge has at least raised the issue of whether or not the payment is appropriate.

A bankruptcy judge said it would be "inappropriate" to approve a $20 million exit package for the outgoing chief executive of American Airlines parent AMR Corp., calling it his only "hang-up" as he cleared the way for a merger with US Airways  Group Inc.

One has to admire the judge for his restraint, as he uses the term “inappropriate” to describe the payment.  The more appropriate term might be “thievery”.  Why?  Because an individual who was probably the single most person responsible for the bankruptcy should get nothing except a shove out the door.

Yes, there is a law against this sort of thing, but laws don’t even slow down lawyers who are getting millions to protect the interests of those whose malfeasance caused American to fail.

The law, added as part of a Bankruptcy Code overhaul in 2005, forbids severance payments to so-called "insiders" of companies under Chapter 11 protection unless the compensation is applicable to all full-time employees or is less than 10 times the average severance paid to non-management employees during the same calendar year. Insiders are generally defined under bankruptcy law as executives, directors or others controlling a company.

American's lawyers at Weil, Gotshal & Manges LLP argued the severance would be paid by the new merged airline and therefore wasn't subject to the Bankruptcy Code's restrictions.

Mitt Romney and his ilk railed against the entitled class, but never named anyone.  Ok, if anyone still cares, here is an example, a man who thinks he is entitled to $20 million for driving a company into bankruptcy

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