[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
EXECUTIVE COMPENSATION IN CHAPTER 11 BANKRUPTCY CASES: HOW MUCH IS TOO
MUCH?
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HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
APRIL 17, 2007
__________
Serial No. 110-11
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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34-755 PDF WASHINGTON : 2007
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts RIC KELLER, Florida
ROBERT WEXLER, Florida DARRELL ISSA, California
LINDA T. SANCHEZ, California MIKE PENCE, Indiana
STEVE COHEN, Tennessee J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
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Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
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APRIL 17, 2007
OPENING STATEMENT
Page
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Ranking Member, Subcommittee on Commercial
and Administrative Law......................................... 2
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and
Administrative Law............................................. 4
WITNESSES
Mr. Damon A. Silvers, Associate General Counsel, American
Federation of Labor and Congress of Industrial Organizations,
Washington, DC
Oral Testimony................................................. 8
Prepared Statement............................................. 10
Ms. Antoinette Muoneke, Association of Flight Attendants--CWA,
Federal Way, WA
Oral Testimony................................................. 14
Prepared Statement............................................. 15
Mark S. Wintner, Esquire, Stroock & Stroock & Lavan LLP, New
York, NY
Oral Testimony................................................. 17
Prepared Statement............................................. 19
Richard Levin, Esquire National Bankruptcy Conference, New York,
NY
Oral Testimony................................................. 21
Prepared Statement............................................. 23
APPENDIX
Material Submitted for the Printed Hearing Record
Prepared Statement of the Honorable Stephen I. Cohen, a
Representative in Congress from the State of Tennessee......... 43
Material for the printed hearing record submitted by the
Association of Professional Flight Attendants (APFA), to the
Honorable Linda Sanchez:
News Release concerning American Airlines Flight Attendants'
Nationwide Protest......................................... 44
Submission entitled ``2003 Sacrifices from AA Flight
Attendants Restructuring Agreement''....................... 45
Submission entitled ``American Airlines Flight Attendant
Facts''.................................................... 47
Submission entitled ``APFA FACTS On American Airlines
Executive Bonus vs Employee Concessions''.................. 48
Prepared Statement of Patricia A. Friend, International
President, Association of Flight Attendants--CWA, AFL-CIO...... 49
OFFICIAL HEARING RECORD
Material Submitted but not Reprinted
Cover letter regarding Proxy Statement filed by UAL Corp., from
Mark Anderson, Vice President of Government Affairs, UAL Corp.,
to the Honorable John Conyers, Jr., Chairman, Committee on the
Judiciary, submitted by the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law
Form DEF 14A UAL Proxy Statement submitted by the Honorable Chris
Cannon, a Representative in Congress from the State of Utah,
and Ranking Member, Subcommittee on Commercial and
Administrative Law
EXECUTIVE COMPENSATION IN CHAPTER 11 BANKRUPTCY CASES: HOW MUCH IS TOO
MUCH?
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TUESDAY, APRIL 17, 2007
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:34 a.m., in
Room 2141, Rayburn House Office Building, the Honorable Linda
Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Conyers, Johnson,
Delahunt, Cohen, Cannon, Jordan, Feeney, and Franks.
Ms. Sanchez. This hearing of the Committee on the Judiciary
Subcommittee on Commercial and Administrative Law will come to
order.
Before we begin today's hearing, out of respect for the
victims and families of yesterday's tragedy at Virginia Tech, I
would like to begin this hearing by observing a brief moment of
silence for those victims and their families.
Thank you.
I will now recognize myself for a short statement.
As a result of many Chapter 11 bankruptcy proceedings,
``the rich are getting richer while the poor are getting
poorer,'' as stated in a recent press release by the Northwest
Flight Attendants Union.
This is a compelling summary of a recent phenomenon that
should concern all of us. Chapter 11 of the Bankruptcy Code was
originally enacted to give all participants an equal say in how
a business, struggling to overcome financial difficulties,
should reorganize. Unfortunately, this laudable goal does not
reflect reality, especially for certain participants in Chapter
11.
This problem is clearly illustrated by the numerous Chapter
11 cases in which chief executive officers receive outrageously
large compensation and bonus packages while they simultaneously
slash the wages, benefits and even jobs of the workers who are
the backbone of those businesses.
``All too often,'' as one bankruptcy judge recently
observed, executive retention plans ``have been widely used to
lavishly reward, at the expense of the creditor body, the very
executives whose bad decisions or lack of foresight were
responsible for the debtor's financial plight.''
This is an issue that deserves more attention from this
Committee.
While I commend my colleagues on both sides of the aisle,
Ranking Member Chris Cannon and Representative Bill Delahunt,
for their efforts to address certain aspects of this problem,
much more, unfortunately, still needs to be done.
Here is just one example. The chief executive officer of
UAL Corporation, the parent of United Airlines, received
compensation worth $39.7 million in 2006, just after UAL
emerged from 3 years of Chapter 11 bankruptcy protection.
During the course of its bankruptcy, however, UAL terminated
pensions for 120,000 workers and shifted $5 billion in pension
obligations to the PBGC, resulting in the largest pension
default in the history of the United States, according to the
Associated Press.
These inequalities are astounding. The Executive
Compensation Committee of the American College of Bankruptcies
recently issued a report noting that employee retention and
incentive compensation programs present a ``daunting
challenge.'' It continued, there are few issues faced by
Chapter 11 debtors that are more difficult and potentially
contentious than management compensation issues.
Accordingly, I look forward to hearing the testimony of the
witnesses at today's hearing. To help us further explore these
issues, we have a truly notable witness panel.
We are pleased to have Damon Silvers, Associate General
Counsel for the AFL-CIO; Antoinette Muoneke, a United Airlines
flight attendant and representative of the Flight Attendants
Association; Mark Wintner, expert on employee benefits and
executive compensation; and Richard Levin, vice chair of the
National Bankruptcy Conference.
Rest assured that it is my intention to consider in future
hearings other aspects of the imbalance that exists in Chapter
11 concerning management and labor, particularly with respect
to collective bargaining agreements and retirement benefit.
Additionally, there are other issues in bankruptcy that should
be addressed by this Committee, including the compensation of
trustees in Chapter 7 cases.
It has been many years since Congress has examined these
issues. I know Committee Chairman John Conyers shares my
concern about the urgent need to refocus and conduct a long
overdue analysis of Chapter 11 and how it impacts workers.
I would now like to recognize my colleague, Mr. Cannon, the
distinguished Ranking Member of the Subcommittee, for any
opening remarks he may have.
Mr. Cannon. Thank you, Madam Chair.
Today we are considering an issue of common interest
regarding how to best compensation executives who must rescue
and rehabilitate enterprises contributing products, services
and jobs to our society under Chapter 11 of the Bankruptcy Act.
Chapter 11 seeks to reconcile many independent interests,
just like other chapters of the Bankruptcy Code, but the
paramount aim of Chapter 11 is to save companies that can still
be saved.
To reach that aim, we have to strike the right balance
between conserving founder companies' resources and spending
enough of those resources to keep on track the management teams
that can turn those companies around and return them to
prosperity. If we don't get that right, the entire Chapter 11
system is undermined.
In the Bankruptcy Abuse and Consumer Protection Act, we
enacted a number of limitations on executive compensation in
Chapter 11 settings. Several of these limitations, codified in
section 503C1 of the act, are known as Key Employee Retention
Plan or KERP's provisions.
Under the KERP's provisions, subject to court approval,
special retention packages designed to induce key executive
personnel to stay on at a Chapter 11 company can now be made
only when they are, first, essential to the retention of an
individual because the individual has a bona fide job offer
from another business at an equal or greater salary; two,
essential to the survival of the business; and, three, do not
exceed certain levels indexed to prior year non-management pay
executive retention bonuses.
Prior to enactment, concerns were noted about these
provisions; the proponents offered that they were necessary to
prevent Enron-type abuses. Others, however, including me,
believe that they are unduly restrictive. I believe that such
tight restrictions on management compensation are merited only
where there is evidence of insider negligence, mismanagement or
fraudulent conduct that contributed in whole or in part to the
company's insolvency.
Otherwise, I believe we would run the risk of hampering
companies' best chance to survive and prosper by failing to
retain talented and responsible management already intimately
familiar with the company. Some say that if we focus too much
on such considerations, we run the risk of paying management
too much to stay while potentially cutting labor pay and
benefits.
In the last Congress, such arguments led to the
introduction of legislation that would have extended the
already too restrictive KERP's provisions to performance and
incentive pay bonuses and other forms of executive compensation
essential to competing in the market for executive personnel.
That argument is false. It is critical that a Chapter 11
debtor be able to retain management that is dedicated to
maintaining the company's value, not out of self-interest of
executives but for the benefit of all of its creditors,
investors, employees and stakeholders. All too often, companies
that fail to reorganize successfully are converted to Chapter 7
for liquidation, where not only do the creditors receive
pennies on the dollar, but employees face a much bleaker
prospect of losing their jobs.
Courts have now had experience implementing the KERP's
provisions and companies have attempted to survive under them.
This hearing presents a good opportunity to see whether the
provisions are working or are counterproductive.
What the record shows is that in practice the KERP's
provisions have generated some controversy. In the Dana Corp.
case, for example, the bankruptcy court in Manhattan denied an
initial executive compensation plan.
That plan consisted of the following: a base salary for the
CEO of $1.552 million and of $500,000 to $600,000 for other
executives; an annual incentive program or AIP that could have
paid the executives anywhere from $336,000 to $528,000 and the
CEO up to $2 million; a completion bonus that would provide a
minimum of $400,000 to $560,000 for executives and $3.1 million
for the CEO upon the effective date of the plan of the
reorganization as well as uncapped bonus based on the total
enterprise value of the debtors 6 months after the effective
date of the reorganization plan; and finally, four, a severance
non-compete package worth more than $167,000 per month for up
to 18 months if the CEO was terminated for anything other than
cause.
Without knowing more, one can imagine that such a plan
might be unduly generous. The court found it so, focusing
largely on the conclusion that the plan's guaranteed payments
to executives could only be treated as retention payments
subject to section 503C1 rather than incentive payments subject
to a business judgment rule under the sub-provisions of section
503C3.
In November 2006, the court approved a modified and more
modest plan. The approved plan was found to be an incentive
plan escaping the KERP's provisions, but only because the court
reviewed the plan holistically and did not draw on the features
of the plan that were similar to those previously rejected for
violating the KERP's provisions. The court emphasized that
merely because a compensation plan has some retentive effect
does not mean that the plan overall is retentive rather than
incentivizing in nature.
Under this approach, if a plan is on the whole
incentivizing in nature, it may not be subject to otherwise
applicable KERP's provisions. Some believe that this approach
opens up a loophole in the Bankruptcy Code and that we should
close that loophole. Others may believe that it shows all the
more that restrictions like KERP's provisions need to be
imposed on incentive pay and other forms of executive
compensation.
I believe that the Dana Corp. case shows in one important,
real-life example how the KERP's provisions have underserved
the needs ot Chapter 11 companies for flexibility in
structuring executive compensation packages that can keep the
right management teams in place. I believe that it shows that
experienced bankruptcy courts see the same thing and are
straining to interpret the code in a way that would help keep
Chapter 11 companies from becoming Chapter 7 economic
shipwrecks.
I look forward today to hearing from all of the witnesses
on these and other cases as we hear their views on how the
KERP's provisions are working or not working in practice and I
hope this hearing helps us better understand the importance of
not undercutting the needs of Chapter 11 companies for
essential leadership.
Thank you, Madam Chair. I yield back.
Ms. Sanchez. I thank the gentleman for his statement.
I would now like to recognize Mr. Conyers, a distinguished
Member of the Subcommittee and the Chairman of the Committee on
the Judiciary.
Mr. Conyers?
Mr. Conyers. Thank you so much, Madam Chairperson.
Let me tell you how pleased I am that you and Chris Cannon,
your Ranking Member, Bill Delahunt from Massachusetts, are all
looking at something that hasn't been examined for some 20 or
more years.
What we are talking about is the inequality in incomes in
this great country of ours. I want to be the first to say it
here: the rich are getting richer, the poor are getting poorer.
One percent of the top 300,000 people make nearly, or aggregate
nearly as much as the 150 million others in the tax scheme in
the United States of America.
So we are looking at this section 11 for the first time and
I want to congratulate you.
I would like unanimous consent to have entered in at the
end of my comments the ``Nation'' article of April 23, 2007,
entitled, ``A Time to Act on Inequality.''
Ms. Sanchez. Without objection, so ordered.
[The submission from Mr. Conyers follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Conyers. Now, too often we have got executives
receiving extravagant multi-million-dollar bonus packages,
stock options, and golden parachutes, while the workers at the
same time are being drastically reduced in their pay, their
pensions, their health care. And sometimes, of course, they
lose everything.
We are just finally getting around to it and I am so proud
of this Subcommittee on Commercial and Administrative Law, that
we are examining this question. It is way, way overdue.
Now, you talked about Glenn Tilton at United Airlines, but
I have got a friend of mine in Detroit at Ford Motor Company,
Alan Mullaley, who was paid--he just started--$28 million in
the first 4 months of his job, from a company that has reported
a $12.7 billion loss for last year and is reducing and
relocating factories all across the country.
Ford, General Motors, Daimler-Chrysler prepare to start
negotiations with the unions to obtain concessions and labor
savings with the current contracts, how do they do that? Well,
I will tell you. It is because section 1113 of the Bankruptcy
Code allows the debtors to avoid contractual obligations under
collective bargaining agreements with their workers.
People keep asking why is the UAW conceding so much to the
corporations. Well, it is because the corporations tell them we
are going into bankruptcy, we are going into court, and we have
got the authority to eliminate contractual obligations.
How many lawyers would enter into an agreement and then one
of them calls back the other in a year and says, well, things
have gone sour, we have got to renegotiate, my friend. They
would be asked if they lost their minds. But this is in
bankruptcy law at this point.
And so it is time we try to deal with this. The gentleman
from Massachusetts, Senator Kennedy, tried vainly to improve on
it. I introduced legislation with Evan Bayh of Indiana just in
the last Congress to try to at least make the executives report
the amounts of money that they are receiving. This goes in
under the radar screen.
And so this hearing couldn't have come at a more
appropriate time. I commend the Members of the Subcommittee,
but especially the Chairwoman.
Ms. Sanchez. Thank you for your statement, Mr. Conyers.
Without objection, other Members' opening statements will
be included in the record.
And without objection, the Chair will be authorized to
declare a recess of the hearing.
I am now pleased to introduce the panel of witnesses for
today's hearing. Our first witness is Damon Silvers, associate
general counsel for the AFL-CIO. Prior to his current role, Mr.
Silvers was a law clerk for the Delaware Court of Chancellery
for Chancellor William T. Allen and Vice Chancellor Bernard
Balick. Mr. Silvers is also a member of the American Bar
Association Subcommittee on International Corporate Governance.
Welcome.
Our second witness is Antoinette Muoneke. Ms. Muoneke has
been a flight attendant for United Airlines since 1979. She
resides in Federal Way, Washington.
Thank you for being here.
Our third witness is Mark Wintner, a partner at the law
firm, Stroock and an expert on employee benefits law and
executive compensation. Mr. Wintner chairs the American Bar
Association Business Law Employee Benefit Subcommittee on
Planned Termination, Merger and Bankruptcy. Mr. Wintner also
serves as a member of the ABA's Joint Council on Employee
Benefits.
Thank you for being here.
And our final witness is Richard Levin, vice chair of the
National Bankruptcy Conference. Mr. Levin is a partner at
Skadden Arps, concentrating on corporate restructuring and
solvency and bankruptcy issues. Mr. Levin was counsel to a
House Judiciary Committee Subcommittee and was one of the
principal authors of the Bankruptcy Code and the Bankruptcy
Reform Act of 1978.
We appreciate you being here this morning as well.
Without objection, your written statements in their
entirety will be placed into the record and so we would ask
that you limit your oral testimony to 5 minutes.
You will note that we have a lighting system that starts
with a green light. At 4 minutes, it turns yellow. That is your
warning that you have a minute to try to summarize your
testimony. At 5 minutes, the light will turn red, notifying you
that you are in fact out of time.
We will let you go a little bit over to let you complete
your thoughts, but please try to be mindful of the time and the
lights.
After each witness has presented his or her testimony,
Subcommittee Members will be permitted to ask questions subject
to the 5-minute limit.
Mr. Silvers, will you please proceed with your testimony?
TESTIMONY OF DAMON A. SILVERS, ASSOCIATE GENERAL COUNSEL,
AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL
ORGANIZATIONS, WASHINGTON, DC
Mr. Silvers. Thank you, Madam Chairperson. My name is Damon
Silvers. I am an associate general counsel of the American
Federation of Labor and Congress of Industrial Organizations. I
will try to be brief so that my client to my left can speak,
who I think really has point of precedence here.
In 2002, the AFL-CIO helped over 5,000 laid off Enron
workers, non-union workers, recover up to $13,500 in severance
money that had been taken away from them in the bankruptcy
process. During that time, the chief executive officer of
Enron--this is after the departure of Ken Lay--during that time
the chief executive officer was Steve Cooper, a principal in
the turnaround group of Zolfo-Cooper.
Enron, of course, liquidated. It was one of those bad
situations that Congressman Cannon was referring to. But when
the case completed, Steve Cooper's firm received about $120
million in compensation for the work he did.
Mr. Cooper then went out and bought for himself a $20
million penthouse apartment on Fifth Avenue, perhaps the most
expensive piece of apartment real estate purchased in New York
to date.
Contrast Steve Cooper's fate with that of my friend Louis
Allen, who was a mid-level executive at Enron. He was in charge
of transportation at Enron. Mr. Allen was a single father, the
first person in his family to go to college and to work in
management. Mr. Allen lost his job, his 401(k), his health
insurance and his home and, with his 11-year-old daughter, had
to return to living with his mother, who worked as a grocery
clerk in Houston.
Louis Allen, in the end, got only a small fraction of the
severance he was promised by Enron, and in the fall of 2002,
still without a job and living with his mother and 11-year-old
daughter, Mr. Allen had a stroke and died at the age of 44.
Neither he nor his mother nor his daughter has, to date,
received any meaningful recovery from his lost pension.
The AFL-CIO is extremely proud of the role that the working
people of this country played in standing up for the Enron
workers, but we do not believe that the outcome I just
described, on the one hand for Mr. Cooper and on the other hand
for Mr. Allen, could be described by any sane person as just.
And in this respect, Enron was not the exception but the rule.
Let me give you a couple of examples from some more recent
well-known bankruptcies. United Airlines: all United employees,
including Ms. Muoneke to my left, lost their real pension plans
and all the retirees had substantial cuts in their retiree
health benefits. United flight attendants, who before the
bankruptcy had incomes typically in the 30's--$30,000, not $30
million--took pay cuts of 17 percent.
I don't think most of us can possibly comprehend what it
means to be living on a $30,000 a year income and take a 17
percent pay cut.
As you mentioned, Madam Chairwoman, the CEO got $39 million
in stock and an $840,000 cash bonus.
Delphi Corporation: tens of thousands of jobs gone. Motions
in front of the bankruptcy court to cut middle class wages to
$12.50 an hour, and in parallel, motions in front of that court
for close to $500 million in total executive comp, $40 million
of which have been granted.
Dana Corp.: Congressman Cannon, I think, described in great
detail what the executive comp package that was eventually
approved was. For those of us who may be slow on the math, that
is about $7 million a year in potential comp that was awarded
by the court, following the Congress's attempt to rein these
matters in, while simultaneously that same company is seeking
to cut pay, to end programs, to end benefits for workers such
as life insurance, long-and short-term disability, even tuition
reimbursement. And to completely eliminate Dana's obligation to
pay retiree health care benefits.
Like so much of our system of business regulation and
corporate governance, our business bankruptcy system has become
a vehicle for the transfer of evermore staggering amounts of
wealth from a variety of parties, but in particular from long-
term employees, into the hands of a very, very small number of
executives and turnaround specialists.
As was discussed earlier, Madam Chairwoman, Congress has
tried to rein in this intolerable trend by placing strict
limitations on so-called retention bonuses in bankruptcy.
Unfortunately and predictably, the corporate response has been
to relabel the same amount of money and keep paying it, and the
courts appear to be going along with that maneuver.
The bankruptcy system has become a mere mirror of the
excesses found in the larger corporate culture, but there are
structural reasons why those excesses are particularly harmful
in bankruptcy. Those structural reasons--and I will try to wind
up here--those structural reasons, the central aspect of them
is the fact that bankruptcy is an environment in which all
contracts are potentially breachable. And so the typical
rationale for focusing executive behavior on one particular
constituency, the equity of the company, does not apply in
bankruptcy.
And the further harmful aspect of this is the incentive
effect on executives who are contemplating from the perspective
of a company not yet bankrupt, who are contemplating going into
bankruptcy and declaring a war of choice against their
employees and their communities.
In response, the AFL-CIO believes the Congress should take
two steps to address these problems with executive pay. First,
the sorts of procedural protections that Congress recently put
in place with respect to KERP's should be brought in to cover
executive pay in its totality so that the sort of game-playing
that Congressman Cannon alluded to cannot take place.
Secondly, Congress should mandate that pre-petition
executives, executives who have not filed yet, who are seeking
to breach contractual commitments to their employees should
have to personally share the pain in an amount proportional to
what they are asking their colleagues to bear. Such a measure
would focus the minds of executives contemplating bankruptcies,
as I have said, as a war of choice, before they made any
decisions that the rest of us might come to regret.
The AFL-CIO looks forward to further hearings and I thank
you for your time.
[The prepared statement of Mr. Silvers follows:]
Prepared Statement of Damon A. Silvers
Good morning, Chairwoman Sanchez, my name is Damon Silvers and I am
an Associate General Counsel of the American Federation of Labor and
Congress of Industrial Organizations. First, let me express the labor
movement's gratitude to you and the Committee for holding this hearing
on the enormously important question of whether executive compensation
in our business bankruptcy system is fulfilling the overall purposes of
the bankruptcy code.
In 2002, the AFL-CIO assisted over 5,000 laid off non-union Enron
workers in their efforts to obtain the severance payments they needed
to live on while they found new work. After months of litigation in the
bankruptcy courts, we obtained a settlement which paid the workers up
to $13,500 in lost severance pay. During that time the Chief Executive
Officer of Enron was Steve Cooper, a principal in the turnaround firm
of Zolfo Cooper. Enron of course liquidated, and when the case
completed, Steve Cooper's firm asked from the court a $25 million
``success fee,'' even though the Justice Department's U.S. Trustee
Program uncovered unacceptable billing practices (Cooper eventually
agreed to cut this fee in half). This was after Cooper and his firm
were already paid $107 million for their work.\1\ Cooper recently
bought a $20 million penthouse on 5th Avenue, one of the most expensive
apartments sold in Manhattan during the real estate boom.
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\1\ The Houston Chronicle, 3/28/2006.
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Contrast Steve Cooper's fate with that of Louis Allen, a mid-level
executive at Enron. Lewis was a single father, the first person in his
family to go to college and work in management. He lost his job, his
401k, his health insurance and his home, and with his daughter had to
return to living with his mother, who worked as a grocery clerk in
Houston. Lewis Allen in the end only got a fraction of the severance he
was promised. In the fall of 2002, still without a job and living with
his mother, Lewis had a stroke and died at the age of 44. Neither he
nor his mother nor his daughter has to date received any meaningful
recovery from his lost pension.
The AFL-CIO is extremely proud of the role the working people of
this country played in standing up for the Enron workers. But we do not
believe the outcomes I just described could be described by any sane
person as just. And the outcome at Enron has much in common with the
grotesque inequities workers experience throughout the business
bankruptcy system today.
Let me give you a couple of examples from some well-known recent
bankruptcies.
Polaroid--Upon filing for Chapter 11 in 2001, Polaroid reneged on
its severance policies, and cut off all company payments for employees'
health, dental and life insurance plans. Six months later, a bankruptcy
judge approved Polaroid's plan to pay $4.5 million in retention bonuses
to forty executives. The plan approved by the court provided for the
most senior executives in the pool to receive bonuses of as much as
62.5% of their base pay as well as severance payments also equal to
62.5% of their base pay. Other executives would be eligible to receive
bonuses and severance payments equaling 25 to 50% of their base
salaries.\2\
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\2\ Jessi D. Herman, Pay to Stay, Pay to Perform or Pay to Go?:
Construing the Threshold Terms of 503 (C)(1) and (2), Emory Bankruptcy
Developments Journal, Fall 2006, 319
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United Airlines--United went into bankruptcy as a strategy to
extract significant labor cost cuts. All United employees lost their
defined benefit pension plans and retirees ended up with substantial
cuts in their retiree health benefits. United employees took 15% to 40%
pay cuts, including a 17% cut for flight attendants and 40% cut for
pilots. In total, over 50,000 United employees gave up several billions
of dollars. At the end of the case, United proposed emergence stock
grants for management worth $150 million in its reorganization plan--
about 9% of the new stock of the company. Last year pay and stock worth
$39 million was awarded to United CEO Glenn Tilton, including an
$840,000 bonus (over 120% of his base salary).
Delphi Corporation--Delphi, a large automotive supply company went
into bankruptcy in 2005. Delphi immediately proposed to eliminating
thousands of U.S-based jobs and cutting the middle class wages earned
by people making sophisticated auto parts down to as little as $12.50
an hour. At the same time--mere weeks into its bankruptcy case--Delphi
unveiled a Key Employee Compensation Program of six-month ``bonus
opportunities'' and an emergence bonus plan consisting of $88 million
for some 486 managers--some payments as much as 280% of salary. In
addition, Delphi proposed to grant 10% of the reorganized Delphi's
equity to 600 executives, a program valued at $400 million, including
$12.5 million in restricted stock for its top five executives. Just
prior to bankruptcy, Delphi enhanced its severance program for 21
executives--severance that would pay out between $30 million and $145
million. So far, Delphi has gotten approval of bonus plans worth about
$40 million a year but the severance payments were not even subject to
court oversight, nor was a signing bonus paid to Delphi's new CEO in
lieu of salary, since they were in place before Delphi filed its case
mere days before the new Bankruptcy Code amendments took effect.
Dana Corporation--Dana is another automotive parts supplier that
filed a bankruptcy case in New York last year. Dana's restructuring
plan is to send as many good-paying U.S. manufacturing and assembly
jobs as it can to Mexico and other low cost economies. For the jobs
that are left, Dana asked the bankruptcy court to cut pay, and cut or
eliminate a wide range of benefits such as life insurance, long and
short term disability--even tuition reimbursement programs, and
completely eliminate Dana's obligation to pay retiree health benefits.
Before they got to bankruptcy court on the workers' pay and benefits,
though, Dana's senior executives renegotiated their employments
contracts. Those contracts, which included significant stock-based
compensation pre-bankruptcy, were not worth what the executives thought
they'd be worth as a result of Dana's bankruptcy. Under their
renegotiated contracts, Dana's CEO, between a base salary of $1 million
per year plus bonuses, can earn $6.5 million a year while the company
is in bankruptcy. The other five senior executives can earn combined
annual compensation of $ 7 million while their company is in
bankruptcy.
US Airways--US Airways went through two bankruptcy cases in which
the pilots' pay alone was cut up to 50%. In addition, by the time the
two cases were over, all the employees lost their pension plans and
retiree health was all but eliminated. US Airways' management got a
bonus and severance program worth some $20-30 million.
Workers in chapter 11 cases across a wide range of industries
(manufacturing, airline, trucking, retail and other service
industries), are paying an enormous price under threats that their
labor agreements will be rejected, their jobs will be outsourced and
retirement security threatened. Meanwhile, company executives and
management move quickly to secure their own agreements and replace
compensation such as supplemental executive retirements plans and
stock-based compensation rendered worthless by the bankruptcy payment
priorities with new, lucrative programs that insulate them from the
economic dislocation of the bankruptcy.
Like so much of our system of business regulation and corporate
governance, our business bankruptcy system has become a vehicle for the
transfer of ever more staggering amounts of wealth from a variety of
parties, but in particular long term employees, into the hands of a
very, very small number of executives and turnaround specialists.
Recently, Congress tried to rein in this intolerable trend by placing
strict limitations on so-called retention bonuses in bankruptcy.\3\ In
response, the management community and their compensation consultants,
with the full cooperation of the bankruptcy bench, appear to have
continued the same type of post-petition payments to pre-bankruptcy
management under new labels--most prominently now as ``incentive pay,''
where highly speculative incentive targets are designed to guarantee
some payment, even for delivering a business plan or reorganization
plan, something reorganization fiduciaries are required to do
anyway.\4\
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\3\ The Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (BAPCPA), 11 U.S.C. Sec. 503(c)(1), provides that the debtor shall
not make payments to insiders such as executives for the purpose of
inducting such person to remain with the debtor's business without an
express finding by the court that 1. The payment or obligation is
essential to keep the person from accepting a bona fide job offer for
the same or greater pay; 2. The person's continued retention is
essential to the survival of the business; and 3. The amount of payment
to made or obligation to be incurred does not exceed either 10 times
the amounts paid to non-management employees in the same calendar year
or 25 percent of the amounts paid to insiders in the calendar year
preceding that in which the payment is to be made, as described by Yair
Listoken, Paying for Performance in Bankruptcy: Why CEOs Should be
Compensated with Debt, John M. Olin Center for Studies in Law,
Economics, and Public Policy Research Paper No. 334, Yale Law School,
p. 5, quoting Jason Brookner, Law Limits Executive Compensation, May/
June Executive Legal Advisor (2006).
\4\ See In re Dana Corp., 351 B.R. 95 (Bankr. S.D.N.Y. 2006).
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Runaway executive compensation in bankruptcy takes place in two
contexts--the context of the general explosion in executive
compensation in American business, and the second is the unique and not
well-understood context of corporate governance in bankruptcy.
The bankruptcy system necessarily gives the debtor (aided by the
bankruptcy courts) great latitude in crafting the path for businesses
in Chapter 11 to return to financial health. Part of this approach is
both explicitly by statute and even more so in practice for bankruptcy
judges to grant substantial deference to both the immediate requests of
the debtor in possession, and to give the debtor initial exclusivity in
proposing a plan. These basic structures of the Code are absolutely
necessary--but they left the courts ill-prepared to deal with the
culture of CEO excess because what that culture is all about is the
executives of the debtor in possession proposing a series of self-
enriching transactions, usually with the support of a coterie of
experts, again paid by the debtor in possession. The Lake Wobegon
effect that has long been noted in executive compensation is
particularly powerful in bankruptcy, where courts tend to apply a
reasonableness test to applications for enormous post-petition
executive pay packages based on the representations of one or more
consultants that this package is within the third quartile for
companies of this type.
The bankruptcy system has become a mere mirror of the excess found
in the larger corporate culture. The dimensions of that excess have
recently been explored by the House Financial Services Committee.\5\ It
is sufficient to point out here that Chief Executive Officer pay in 350
public companies with revenue in excess of $1 billion has risen by 300%
in the last fifteen years, and that CEO pay is on average 411 times \6\
that of the average worker, up from 107 times in 1990 and 42 times in
1980.\7\
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\5\ Reference recent Barney Frank hearing transcript. http://
www.house.gov/apps/list/hearing/financialsvcs--dem/hr030607.shtml. The
AFL-CIO tracks executive pay trends in public companies on our Paywatch
website, http://www.paywatch.org. An analysis of 2007 proxy data on
executive pay was posted earlier this month.
\6\ United for a Fair Economy/Institute for Policy Studies,
``Executive Excess 2006''. Total executive compensation data based on
Wall Street Journal survey, 4/10/2006; all other years based on similar
sample in BusinessWeek annual surveys of executive compensation, now
discontinued. Average worker pay is based on U.S. Department of Labor,
bureau of Labor Statistics, Employment, Hours, and Earnings from
Current Employment Statistics Survey.
\7\ BusinessWeek, 4/22/2002.
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But runaway executive pay in bankruptcy is not just another example
of this larger problem. There are structural reasons why when the
excess and inequity that characterizes our corporate economy as a whole
is moved to the bankruptcy setting it is both even less defensible and
does significantly more harm.
Much modern thinking in corporate governance begins from the
distinction between constituents of the corporation with fixed
contractual claims (lenders, suppliers, customers and workers) and
those with variable, and in particular marginal claims (equity
holders). But in bankruptcy the one thing that is clear is that
contractual claims to one degree or another are not going to be
honored.
Secondly, the purpose of the Code is very clear--it is to preserve
as much going concern value as possible, and in the process preserve
the bankrupt firm for the explicit purpose of preserving both jobs and
community economic structures. It is not to maximize the value of any
given constituency of the firm--be that secured creditors, unsecured
creditor, or most inappropriately, the pre-petition equity holders.
Thus the notion, always ultimately hard to defend in any context,
that corporate executives should be working to maximize one
constituent's value, is particularly inappropriate to bankruptcy law.
And yet, as recent both journalism and academic articles make clear,
debtors are increasingly organizing themselves around one dimensional
measures of business success that easily allow for excessive executive
compensation when those measures are achieved.\8\
---------------------------------------------------------------------------
\8\ See for example, Gretchen Morgenson, ``In Bankruptcy, `For
Sale' May Mean `You Lose''' New York Times, April 15, 2007, Section 3,
p. 1. Thus Listokin (see above) is correct to argue that executives of
bankrupt entities should not have incentives aligned with equity
holders. But he is wrong to suggest those incentives should be aligned
with unsecured creditors in a similar fashion to the way many believe
executive pay should be aligned with the outcomes of equity holders in
solvent corporations. Whatever the merits of this sort of position with
respect to solvent corporations that are honoring their contractual
commitments, these arguments do not address the circumstances of an
insolvent entity.
---------------------------------------------------------------------------
This trend is a departure from the historic experience of
distressed companies. Writing in 1994, Professors Stuart Gilson and
Michael Vetsuypens found that one of the key forces ensuring
accountability by incumbent management in a distressed company was the
pressure from courts and creditors for executives to ``share the
pain.''\9\
---------------------------------------------------------------------------
\9\ Creating Pay for Performance in Financially Troubled Companies,
Journal of Applied Corporation Finance, Winter 1994, 81-92.
---------------------------------------------------------------------------
Congress should be most concerned about these dynamics when they
involve management teams that have taken their companies into
bankruptcy and then seek large compensation packages. Courts'
indulgence of this pattern creates reasonable expectations on the part
of company managements that they can use the bankruptcy process to wipe
out the equity (to which they have a fiduciary duty) and renege on
contractual commitments to the most vulnerable of the company's
constituencies--long term employees and host communities--and they will
be ensured of not only keeping their pre-petition compensation, they
are likely to receive further lavish rewards in addition to the
packages they began with.
The result is not only an imbalance in outcomes. These arrangements
encourage bankruptcy processes that are dominated by an alliance of
incumbent management with subgroups of creditors to the detriment often
of the firm as a whole (see Gretchen Morgenson's April 15 New York
Times report of a new study of asset sales in bankruptcy) and of the
very people the Code was intended to protect. After all, if we just
wanted liquidations for the benefit of the secured creditors, we
wouldn't need a Bankruptcy Code in the first place.
The AFL-CIO believes that Congress in response to the
destabilization of the traditional balance represented by the Code,
should take two steps to address the problems with executive pay in
bankruptcy. First, the sorts of procedural protections that Congress
recently put in place with respect to KERPS should be broadened to
cover executive pay in bankruptcy as a whole. Second, Congress should
mandate that pre-petition executives seeking to breach contractual
commitments to their employees should have to personally share the pain
in an amount proportional to what they are asking their colleagues to
bear. Such a measure would focus the minds of executives contemplating
bankruptcy as a ``war of choice'' against their employees and their
communities.
The AFL-CIO looks forward to further hearings as part of a larger
examination of the fairness of the business bankruptcy process. Thank
you.
Ms. Sanchez. Thank you for concluding.
Ms. Muoneke, will you please begin your testimony?
TESTIMONY OF ANTOINETTE MUONEKE, ASSOCIATION OF FLIGHT
ATTENDANTS--CWA, FEDERAL WAY, WA
Ms. Muoneke. Thank you, Chairwoman Sanchez and Members of
the Subcommittee for holding this hearing. My name is
Antoinette Muoneke. I have been proud to work as a flight
attendant for 28 years.
After graduating from college I chose my career with a
union contract that included a defined benefit pension plan and
a means to follow my dream of providing for a family along with
my own future.
But today it sickens me that my chosen career makes me
qualified to testify about the gross injustice taking place
across corporate America with the blessings of the corporate
bankruptcy laws. I will share my experiences, but I could
easily point you to any of my colleagues. We are all facing the
same uncertainties.
When one of my colleagues said that she wanted the CEO of
our company to explain to her daughter why she had to cancel
her dance lessons, my heart knew her pain, but it gave me the
courage to come here to tell you my story today.
When I started my career, my union contract gave me the
tools to have a secure future, but I knew I had to do my part.
Saving and planning took on a more important role after the
birth of my daughter. After a year of marriage, I found myself
newly divorced and a single mother.
My time off was devoted to my daughter. Our apartment near
Seattle was rented and I was saving to buy a small condo. We
were far from rich, but we had what we needed for a good life
together and security for tomorrow.
Life brings many challenges and in June of 2001 I was
involved in a car accident that kept me off my job for a year.
Health care expenses burned through my savings and I was forced
to borrow against my 401(k), which at the time was only a
supplemental source of retirement.
In that same year, the events of September 11 were
devastating and dramatically changed my job. Little did I know
executives would take advantage of the industry's downturn to
drive executive wages up and their employee wages down. I
cannot escape the conclusion that executives used the
bankruptcy laws to enrich themselves at the expense of workers
like me.
The cuts forced during bankruptcy have turned my life
upside down. I worked full-time before, but now my hours away
from home have increased by nearly 40 percent. My pay is now
$5,000 less than it was prior to these long hours and
additional days away from home. Higher medical costs have
forced me to change my insurance to an HMO, which is fine while
my daughter and I are healthy, but as I care for my mother, who
has persistent health issues, I pray every day that I don't
have to face a life-changing illness that an HMO wouldn't
cover.
Perhaps the most devastating change is the end of my
retirement security. Executives terminated my 1010, and even
with the new retirement plan, over 30 percent of my pension is
gone and because my 401(k) is now my only retirement, I have no
additional savings.
I am still struggling to pay off my 401(k) loan and I have
had to lower my 401 deferrals to 3 percent. That is the full
amount that is required for the company's matching
contribution, but not nearly enough to build a secure
retirement. I will never recover the lost value of my pension,
a pension that I have worked a lifetime to build.
So, am I angry that my CEO has preserved his $4.5 million
trust while he has destroyed my future security? Am I angry
that executives have taken 40 percent or more in raises every
year while I worry that my memory is going because I work such
long hours? Am I angry that last year alone our CEO used the
bankruptcy laws to take pay bonuses and stock equaling over
1,000 times my compensation? Am I angry that his bonus is 125
percent of his annual salary while I don't know what tomorrow
will bring or if I will become a burden to my daughter?
Yes. The answer is yes, I am angry. And I am tired. I was
devastated when my union reported on a court hearing about our
objection to enormous stock and bonus packages management
awarded to themselves. In essence, the judge shrugged his
shoulders and he said there was nothing he could do about it
because the law did not give him a standard to determine how
much is too much.
I don't begrudge executives fair compensation, but explain
to me this, Madam Chairperson. How is it that their pay can
skyrocket while average workers like me have to suffer? If your
answer to this is because the law allows it, then it is time to
change the law.
[The prepared statement of Ms. Muoneke follows:]
Prepared Statement of Antoinette Muoneke
Thank you, Chairwoman Sanchez, and members of the Subcommittee, for
holding this hearing on the growing disparity of compensation between
workers and executives. I especially want to thank you for providing me
with the opportunity to testify today. I am honored and humbled to
represent my co-workers and all of the workers who are enduring life-
changing sacrifice due to pay, healthcare, work rule and pension cuts
forced during Chapter 11 Bankruptcy. We made painful concessions that
affected our families, threatened our children's opportunities,
decreased our ability to afford healthcare and destroyed retirement
security. While workers live paycheck-to-paycheck and worry about what
tomorrow will bring, a select few are lining their pockets with our
sacrifices. We made these sacrifices for the long-term viability of the
companies we worked so hard to help build and hope will continue to
succeed.
My name is Antoinette Muoneke, and I have been proud to work as a
Flight Attendant for 28 years. After working my way through college, on
a fluke I applied with United Airlines just to practice my interview
skills shortly before graduating from the University of Washington.
Just weeks later I was on a plane to Chicago to spend the summer
training to be a Flight Attendant. After one year of flying a furlough
gave way to work in advertising at Sears, which promised many
opportunities for a good career. But when I was recalled to work at my
airline, I chose instead to keep my career as a Flight Attendant. I
enjoyed sharing work with colleagues who were well-educated and
experienced professionals. And, I knew that recent Union negotiations
had secured my retirement with a defined benefit pension plan. It was a
thrill to meet different people every day, to contribute to a well-
respected airline and to know that I would have the means to follow my
dream of providing for a family along with my own future. Today,
however, it sickens me that my chosen career makes me qualified to
testify about the gross injustice taking place in the airline industry
and across corporate America with the blessing of corporate bankruptcy
laws.
Although I am certainly qualified to speak about this issue, I
could easily point you to any one of my colleagues; we are all facing
these same uncertainties. It is not easy to publicly display my private
challenges, but I know that putting a face on the devastating
circumstances families are forced to confront across our country is
more powerful than any horrific statistics. Although I regret the need
to testify, I hope that my personal story will help Congress root out
this injustice that affects so many lives. For me, it was not an easy
decision, but when one of my colleagues said that she just wanted our
CEO to explain to her daughter why she had to cancel her dance classes
my heart knew her pain. If I can help shed light on this inequity with
my story, then I have the courage to share my life with you today. That
courage is strengthened when I think about helping to rebuild a world
with opportunity for my beautiful daughter, Obia.
In my first days as a Flight Attendant my new life seemed
extravagant compared with my time as a ``starving student.'' Still, my
college lifestyle taught me to be frugal and I began saving from the
beginning of my career. My union contract gave me the tools to have a
secure future, but I knew I had to do my part. Saving and planning took
on even greater meaning when my daughter was born and within a year I
was a single mother, newly divorced. Becoming a mother was a career
changing event. I had to rethink my schedule and work hard to maximize
my time at home. Thanks to help from my mother in Obia's first years
and generous assistance from a neighbor at a fraction of normal
childcare costs, I was able to ensure my daughter had constant care and
we lived a modest, but comfortable life. Our apartment near Seattle was
rented, but I was steadily saving to buy a small condo in the same area
and close to a good school.
My time off was devoted to my daughter, and I stayed close to her
as much as I could by volunteering or organizing charity events at her
school. Giving back to my community is important to me and I wanted to
share that with my daughter. We routinely volunteered to help the
homeless by handing out sandwiches and blankets in downtown Seattle or
serving in soup kitchens on the holidays. I have always been proud that
I have been able to provide the tools for my daughter to excel based on
her own developed talents. I made sure that she could attend a good
school where she could be a good student, take part in athletics, music
and drama. We were far from rich, but we had what we needed for a good
life together and security for tomorrow.
Life brings many challenges, and in June of 2001 I was in a car
accident that kept me off the job for a year. I used vacation and sick
leave to keep a paycheck coming, but healthcare expenses burned through
my savings and caused me to borrow from my 401(k). At the time,
borrowing from my 401k did not jeopardize my future when my primary
source of retirement security was my pension plan. Before executives
slashed my pay, benefits and pension, I could have bounced back from a
personal setback like this.
In that same year, the events of September 11th were devastating
and dramatically changed the responsibilities of my job. Little did I
know, executives were at the same time taking advantage of the industry
downturn and the bankruptcy laws to drive executive wages up and worker
wages down to levels I hadn't seen since the early years of my career.
I cannot escape the conclusion that those executives have exploited the
economic downturn and the bankruptcy laws to enrich themselves at the
expense of workers like me.
The cuts forced on workers during the bankruptcy have turned my
life upside down. I worked full time before, but now my hours away from
home have increased by nearly 40%. The airplanes are staffed with fewer
of my colleagues even though nearly every passenger seat is filled and
our safety and security duties have increased. We are forced to work
longer hours, but even if I could cut back my time at work, I couldn't
afford it. Working 40% more doesn't even make up for my loss in pay. I
make about $5000 less than I did prior to these long hours and
additional days away from home. While I have to find time to provide
care for my mother who experiences persistent health issues, I cannot
afford the good healthcare plan that we once had because the
concessions forced by executives also included higher medical costs. I
have had to change our insurance to an HMO, which is fine while my
daughter and I are healthy--but as I care for my mother, I pray
everyday that I don't have to face a life-changing illness that the HMO
wouldn't cover.
I am desperate to insure that my daughter continues to have access
to her good school, the Olympic development soccer program she's
qualified for and her piano lessons. I know that the only way she will
be accepted to college these days is to stand out as extraordinary.
And, the only way to have a chance for a better life, the life we used
to lead, is to get an education. Even so, the cost of college weighs
heavy on my mind and we both hope for an athletic scholarship. But that
means keeping up with her activities and paying for them. I have to
juggle bills every month, worry about our rent and I am not always able
to be at home to get her to practice or games. We have to depend upon
other families to pick her up, and it kills me not to be able to
reciprocate. I have had to stop my charity work due to time
constraints, but this too causes an additional financial burden since
her school increases tuition costs when charitable quotas are not met.
Perhaps the most devastating change is the end of my retirement
security. With my pension plan terminated less than two years before I
could qualify for retirement, my accrued defined benefit is subject to
heavy penalties when paid by the Pension Benefit Guarantee Corporation.
Even with the new retirement plan, over 30% of my pension benefit is
gone. And because my 401k is now my only retirement, I don't have any
additional savings. I am still struggling to pay off my 401k loan, and
I've had to lower my 401k deferrals to just 3%. That's the full amount
required for the company matching contribution, but not nearly enough
to build a secure retirement. I will never be able to recover the lost
value of my pension--a pension I worked a lifetime to build. A pension
promised instead of increases to pay and other Contractual benefits. A
pension that helped me choose this as my career.
So, am I angry my CEO was able to preserve his $4.5 million pension
trust while he destroyed my future security? Am I angry that executives
have taken 40% or more in raises every year while I worry that my
memory is going because I work such long hours? Am I angry that last
year alone our CEO used the bankruptcy laws to take pay, bonuses and
stock equaling over 1000 times my compensation? Am I angry that his
bonus is 125% of his annual salary while I don't know what tomorrow
will bring or if I will be a burden to my daughter? Yes, I'm angry, and
I'm tired.
I was devastated when my union reported what happened in court when
we objected to the enormous stock and bonus packages management awarded
to themselves. In essence, the judge acknowledged our concern, but
shrugged his shoulders and said there was nothing he could do about it
because the law did not give him the authority to second guess
management compensation, or a standard by which to determine ``how much
is too much.''
Airline executives were well paid before the bankruptcy and I don't
begrudge them fair compensation. But explain to me this, Madame
Chairperson, how is it that their pay can skyrocket while the average
worker is made to suffer like this? If your answer is that it's because
the law allows it, then it's time to change the law.
I want to thank you again for giving me the opportunity to testify
today. I will answer any questions that you may have.
Ms. Sanchez. Thank you, Ms. Muoneke.
Ms. Muoneke. I want to thank you for giving me this
opportunity.
Ms. Sanchez. Thank you for your testimony. I know it has
been a very difficult road for you to get here and to give your
testimony, and we appreciate hearing from your perspective.
Mr. Wintner, please begin your testimony.
TESTIMONY OF MARK S. WINTNER, ESQUIRE,
STROOCK & STROOCK & LAVAN LLP, NEW YORK, NY
Mr. Wintner. Thank you, Madam Chairman and Members of this
Subcommittee.
The issues regarding executive compensation are not limited
to Chapter 11, as many of the Members and panelists have
mentioned before. That exists both inside and outside of
Chapter 11. However, to focus in on Chapter 11 compensation
without looking at compensation as a whole, leaves Chapter 11
companies in distinct competitive disadvantage in terms of
retaining or attracting key executives and key employees during
the Chapter 11.
I am not here to defend or criticize the 503(c)
restrictions that were put on retention payments and severance
payments. As alluded to earlier, I do note that the new rules,
particularly on retention payments, are so restrictive as to
virtually have made them disappear and, as a result, somewhat
predictably, as also noted, the focus has shifted on pay-to-
stay plans, which are really no longer tolerable for insiders
under the Chapter 11 rules to pay for performance or pay for
value.
I submit that the continued validity and health of those
programs are essential to many Chapter 11 reorganizations.
Incentive pay in Chapter 11 enables debtors to compete in
the marketplace. That marketplace already, outside of Chapter
11, includes a typical package of salary, bonus, long-term
incentive plans, equity, severance, change of control and other
arrangements. Right now, a Chapter 11 company cannot offer all
of those things.
To further cut back on the ability of a Chapter 11 company
to compensate and incentivize its executives will only lead to
exodus of executives. I am not going to pretend that every
executive is going to leave in that circumstance. Some will and
some won't. But it becomes increasingly difficult to replace
executives.
If you have good executives and they stay and they are
under-compensated, you are lucky. If you have good executives
and they don't stay because they are under-compensated--and
under-compensated, I am not addressing the broader issue of
what executive compensation should be to rank and file
compensation in the universe of the marketplace, just why
Chapter 11 companies cannot be put at a negative disadvantage
to the rest of the marketplace.
If you want to replace management because they are not
doing a good job and are trying to attract somebody and you
cannot fairly compensate them, you are effectively asking them
to leave a marketplace where they are not restricted to enter a
marketplace where they are restricted in the context of a
company which may or may not have a long-term future. That is
very hard to do, virtually impossible.
Now, the courts have developed since the advent of the 2005
restrictions the emphasis on incentive pay instead of retention
pay. Although we are still in the infancy of it, we are about
18 months in, it is working tolerably well. Executives are
receiving lower packages than they did pre the 2005 reform
amendments and some of the--in fact I think almost all the
cases alluded to today predated the advent of those 2005
amendments.
The courts that have addressed it have addressed it under a
business judgment rule, which is not an automatic stamp. There
are several factors that need to be passed before the
bankruptcy court will approve it.
I think it is not coincidental that in addition to the
changes made between Dana 1, where the bankruptcy court in New
York rejected the package as being too much like a retention
plan and not enough like an incentive plan, and the approval 4
months later of the revised program, which was revised in many
respects but equally significant, the Official Creditor
Committee, the Ad Hoc Bond Holders Committee and other
significant parties to Dana all opposed management in the
consideration of the Dana 1 proposal and the court ruled
against it.
The creditor bodies, at least, although not the labor
organizations, supported the revised program for Dana 2 and it
was approved. It was approved, therefore, with at least the
input and the active participation and negotiation by other
parties to the bankruptcy.
Nobody feels good about lost jobs, but nobody has
demonstrated that capping compensation for executives is going
to preserve those jobs. To the extent it simply leads more
companies into liquidation or more likely into asset sales so
as to get themselves out of both the restrictions of Chapter 11
as well as the relentless marketplace pressure on those
troubled companies, that is not going to be good for anybody.
Thank you, Madam Chair.
[The prepared statement of Mr. Wintner follows:]
Prepared Statement of Mark S. Wintner
By way of background, I am a partner in the law firm of Stroock &
Stroock & Lavan LLP and head of the Firm's ERISA and Employee Benefits
Group. I have specialized for over three decades on a broad range of
employee benefit and compensation issues, and have worked extensively
on the employee benefit and compensation aspects of bankruptcy and
reorganization proceedings. Specifically, I have been involved in
advising debtors, official creditor committees, ad hoc bondholders
committees and individual and groups of creditors, investors and
purchasers on benefits and/or compensation matters in numerous Chapter
11 reorganization proceedings, including Delta Airlines, Brooklyn
Hospital, Dana Corp., Loral Space & Communications, Anchor Glass,
Columbia Gas, Piper Aircraft, LTV Steel, Pan Am, Federated Department
Stores, Wheeling-Pittsburgh, Coleco, Flushing Hospital, Raytech and
W.R.Grace.
I also lecture frequently on employee benefit and compensation
matters in bankruptcy and have been a speaker for the American Bar
Association (ABA), Practicing Law Institute (PLI), ALI-ABA and the
Society of Actuaries, among others. I am a member of the American
College of Employee Benefits Counsel and the ABA Joint Council of
Employee Benefits.
The views stated herein are solely those of the author, and do not
necessarily reflect the views of my Firm or any of its partners or of
any Firm clients, past or present.
The very title of the hearing, ``Executive Compensation in Chapter
11 Bankruptcy Cases: How Much is Too Much,'' suggests that there may be
an objective standard which would enable bankruptcy courts and
interested parties in Chapter 11 cases to discern when executive
compensation crosses the line from ``enough'' to ``too much.'' In my
opinion, there is no feasible way of making such a judgment and,
moreover, if there were it would vary from company to company, would
not apply uniformly to different executives within the same company and
would certainly change over time.
As the Subcommittee is aware, the subject of executive compensation
in Chapter 11 cases was addressed by Congress just two years ago, as
part of the Bankruptcy Abuse Prevention and Consumer Protection Act
(the ``Bankruptcy Reform Act''). The Bankruptcy Reform Act added
Section 503(c) to the Bankruptcy Code, effective for Chapter 11 cases
filed on or after October 17, 2005. Section 503(c) acts as a limitation
on the authority conferred under Section 503(b) to allow administrative
expenses of the Chapter 11 debtor's estate. Section 503(c) directs that
even if a claim for compensation would otherwise satisfy the 503(b)
requirements for administrative expenses, the claim will not be allowed
(by the Bankruptcy Court) nor paid (by the debtor) if it falls into any
of the three paragraphs of subsection (c), summarized below:
(1) covers retention compensation to be paid to an insider of the
debtor, such as the debtor's directors, officers or other persons in
control of the debtor, unless the bankruptcy court makes a finding
based on the record that such payment is (i) essential to retaining the
insider because the person has a bona fide job offer from another
business at the same or greater rate of compensation and (ii) the
services provided by the person are essential to the survival of the
business. In addition, the court may only approve retention
compensation programs that are capped at no greater than ten times the
amount of similar payments provided to non-management employees, or if
no such similar payments were made, no more than 25% of the amount of
any similar payments made to such insider for any purpose during the
year prior to the year in which such payment is to be made;
(2) covers severance to be paid to an insider of the debtor, unless
(i) the payment is part of a program that is generally applicable to
all full time employees and (ii) the amount of the payment does not
exceed ten times the amount of the mean severance pay given to non-
management employees during the calendar year in which the severance
payment to the insider is made;
(3) covers post-petition transfers or obligations incurred for the
benefit of officers, managers or consultants, if such transfers or
obligations are outside the ordinary course of business and not
justified by the facts and circumstances. This provision would apply to
incentive compensation and bonus plans.
The focus of this statement is on the type of compensation programs
commonly referred to as key employee retention plans, or KERPs, and in
particular, performance based KERPs. Prior to the enactment of the
Bankruptcy Reform Act, KERPs had been used to provide certain high-
level employees of a debtor with compensation to induce them to stay
with a debtor throughout a reorganization, in addition to the
employee's base salary. These programs covered a wide range of benefits
from severance pay to retention arrangements to success bonuses. They
may have been structured to pay out if an employee remained employed
through a particular date or event (sometimes referred to as a ``stay
bonus''), upon the occurrence of reaching certain business targets, or
if the company terminated the employee. Historically, a debtor would
use a KERP for employees that it considered integral to the operation
(and if applicable, the reorganization or wind-down) of the company,
and that it felt were necessary to retain during the uncertain times of
the reorganization, much like a company outside of reorganization would
use an incentive program to retain employees during uncertain times
such as a downsizing or merger. Before the Bankruptcy Reform Act,
bankruptcy courts applied the business judgment rule to the proposed
KERP (i.e., the court would typically approve a KERP if it was
persuaded that the debtor used sound business judgment, there was a
legitimate business justification and the compensation program was fair
and reasonable).
As discussed above, Section 503(c) of the Bankruptcy Code severely
limits the amount of retention compensation and severance which can be
paid to the debtor's insiders. In effect, the limitations on retention
(or stay) payments and on severance as set forth in Section 503(c)(1)
and (2), respectively, have already answered the question as to how
much is too much for those types of payments. However, KERPs which are
performance driven can still be reconciled with the new law.
Since Section 503(c) became effective less than two years ago, the
decisions (published and unpublished) analyzing and applying the
Section 503(c) restrictions are limited, however, even with this
limited case law, it is beginning to come clear how courts have viewed
the changes to the Bankruptcy Code. The case law has focused on whether
the proposed plan is a ``pay to stay'' compensation plan, primarily
used to retain employees and thereby subject to the limits of Section
503(c), or a ``pay for value'' compensation plan, primarily used as an
incentive for employees to reach certain goals and a reward upon
attainment of those goals and, therefore, subject to the standards of
the business judgment rule.
One of the first cases to discuss Section 503(c) was In re Nobex
Corp., No. 05-20050, 2006 Bankr. LEXIS 417 (Bankr. D. Del. Jan. 19,
2006). In that case, the debtor sought to pay its chairman (acting as
its chief executive officer) and its vice president of finance and
administration incentive bonuses in addition to their regular
compensation. The incentive bonuses were to be paid only in the event
of a sale of the debtor and only if the sale price exceeded a certain
threshold. The debtor argued that the chairman and vice president were
necessary for a successful sale of the company and that they were
committed to their employment even if no incentive compensation was
paid. The court found that the plan was not an inducement for the
chairman and vice president to stay with the debtor, but rather an
inducement to increase the price received by the debtor in a sale,
which would ultimately result in a greater recovery for creditors. The
plan was approved by the court using the business judgment standard,
not the Section 503(c) standard.
In the case of In re Calpine Corp., No. 05-60200, the court
approved a compensation program that included four different types of
incentive payments. The program provided for payment of (i) bonuses
upon the debtor's emergence from Chapter 11, (ii) bonuses based on the
debtor's achievement of certain performance goals established by the
debtor in consultation with various creditor constituencies, (iii) a
supplemental bonus to non-insiders who performed a critical function at
the debtor and were at significant risk of being hired by another
company and (iv) a discretionary bonus to non-insiders. The court
approved the latter two components of the compensation program outside
of Section 503(c) because the payments were to non-insiders. The court
also held that the emergence bonus and performance bonus were outside
of Section 503(c) because they were incentive plans not retention
plans.
In In re Dana Corp., 351 B.R. 96 (Bankr. S.D.N.Y. 2006), the court
rejected the debtor's proposed compensation program for senior
officers. Notably, this was the same court that approved the Calpine
program months earlier. The Dana compensation program, as initially
presented, included a completion bonus that paid out on the debtor's
emergence from bankruptcy, without regard to the actual performance of
the company. The court held that since nothing was required of the
employees other than remaining with the company through emergence, and
it did not meet the requirements of Section 503(c), it was an invalid
retention program. As Judge Lifland stated in the Dana opinion, ``If it
walks like a duck (KERP) and quacks like a duck (KERP), it's a duck
(KERP).'' Dana subsequently revised its program to include performance
criteria and sought approval of the revised plan. With these
significant changes, the court approved the program.
In the recent decision of In re Global Home Products, LLC, 2007
Bankr. LEXIS 758 (Bankr. D. Del. March 6, 2007), the debtor sought
approval of a management incentive plan which would award certain
eligible employees a bonus equal to a percentage of base salary on a
quarterly basis if minimum EBITDAR (Earnings Before Interest, Taxes,
Depreciation and Rent) and/or cash flow objectives were achieved. The
management plan was very similar to prior year incentive plans. The
court analyzed and approved the plan outside of Section 503(c), holding
that the plan was intended to incentivize management, not retain them.
As part of its analysis, the court considered that in the prior year,
under a similar plan, no bonuses were paid since the targets were not
met.
Retaining or attracting key employees, directors or consultants is
important for any company, whether in or out of Chapter 11, but Chapter
11 debtors have additional problems in this regard, most notably the
inescapable fact that the future of the company is more uncertain than
usual and that they cannot offer equity compensation during the
reorganization proceeding. The Bankruptcy Reform Act has significantly
curtailed the use of retention (or stay) bonuses and severance as
meaningful incentives. Therefore, in addition to market competitive
salaries and annual bonuses, performance based KERPS are the most
significant means for a debtor to compensate insiders and remain
competitive with other prospective employers. The ability to do so is
not only important to debtors and insiders themselves, but to the
creditors and other interested parties whose recoveries depend upon
maximizing the value of the debtors.
The early experience with Section 503(c) is that the bankruptcy
courts, after taking into account the view of the various creditor
constituencies and other interested parties, are developing a workable
set of rules which will enable insiders to be compensated on a
competitive basis, but only if their performance has been beneficial to
the estate. There is no need to impose limits on that process,
particularly so soon after the Bankruptcy Reform Act. Any attempt to
impose a one-size fits all absolute dollar or percentage limit on ``pay
for value'' KERPs will frustrate the ability of the interested parties
to design incentive compensation suitable for the particular needs of
the debtor and be detrimental to the Chapter 11 process.
Ms. Sanchez. Thank you, Mr. Wintner.
Mr. Levin, will you please begin your testimony?
TESTIMONY OF RICHARD LEVIN, ESQUIRE,
NATIONAL BANKRUPTCY CONFERENCE, NEW YORK, NY
Mr. Levin. Thank you, Madam Chair, and thank you also, and
the Members of the Subcommittee, for inviting the National
Bankruptcy Conference to be heard on this very important issue
in Chapter 11.
As I note in my prepared testimony, I am here on behalf of
the Conference, not on behalf of my law firm or any clients,
and I am speaking only on behalf of the Conference.
This is a difficult and painful topic, as Ms. Muoneke's
testimony so eloquently stated. Bankruptcy results in loss to
many, and yet it is important that bankruptcy policy do
whatever it can to enhance the value of what is there, whether
through reorganization or through a liquidation proceeding, and
it is important that people be there to carry out their duties
to enhance the value of the company, so that what is left will
be greater than if everybody just walks away.
There is most definitely a fairness element in determining
executive compensation in bankruptcy that has to be balanced
against the need to secure the services of executives and
middle-level and senior managers to run a company while it is
in bankruptcy or to run the liquidation. But the fairness
element cannot be served by going too far in either direction,
by permitting everything or by prohibiting everything.
Section 503(c), enacted 2 years ago, in fact almost exactly
2 years to the day ago, made an attempt at restoring some
balance to an executive compensation system in bankruptcy that
had been subject to very great abuses. Nobody can question
that.
It has its problems in the way it was drafted and
implemented. It is a very difficult and unworkable provision.
But it has served an important purpose in sensitizing the Bar
and more importantly the Bench to the issues surrounding
executive compensation and to providing some appropriate
restrictions, although in our view we think perhaps the
restrictions are more than are necessary to create this
balance.
From our perspective, we look at bankruptcy policy and what
is important in bankruptcy policy. We think bankruptcy policy
is designed to preserve value and to promote fairness among
constituencies that must make sacrifices, and with that we have
four principles that we would state to govern any executive
compensation legislation.
First, each case is unique. You cannot have a one-size-
fits-all solution for all of the varied kinds of companies in
reorganization. Second, consistent with the overall purpose of
the bankruptcy laws, negotiation is the way to resolve these
issues. And there should be adequate time given to the parties
to negotiate resolutions. Neither side should be able to impose
its will.
And, finally, we think basic fairness can be best promoted
by focusing on the compensation of what we will call ``senior
management,'' or senior executives rather than mid-level
management, who usually--and the difference here is that senior
executives tend to have the opportunity to have much more
influence and almost set their own compensation, whereas below
the top level, that is less true.
And based on those principles, we would make two general
recommendations. The first is that there should be procedural
rather than substantive limitations imposed in the area of
executive compensation. Substantive limitations that are too
rigid will defeat the purpose, because they will violate the
one-size-fits-all policy. Every case is unique. But procedural
limitations will give parties time to get to the bargaining
table and negotiate appropriate compensation arrangements to
keep the people needed to preserve value and yet not let it go
too far and give everybody time to be heard before the court.
And second, we would propose that 503(c) or any future
amendment of it be limited to the senior executives as the SEC
defines that term for proxy reporting purposes. They are really
the five most highly compensated executives who have an
executive role. It doesn't encompass the star performer who is
not an executive who needs to be paid to perform and achieve
value.
We think that would loosen the restrictions on people like
Mr. Allen in Enron, that Mr. Silvers has discussed, and still
focus on the top. All of the discussion this morning has been
on the one or two people at the top, and that is where we think
the SEC has got it right, and we would suggest that that be
carried over into the bankruptcy area as well.
Thank you, Madam Chairman. I am ready to answer any
questions.
[The prepared statement of Mr. Levin follows:]
Prepared Statement of Richard Levin \1\
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\1\ Partner, Corporate Restructuring Department, Skadden, Arps,
Slate, Meagher & Flom LLP, New York, NY. The views expressed in this
testimony are expressed solely on behalf of the National Bankruptcy
Conference and do not necessarily represent the views of Mr. Levin,
Skadden, Arps, or any of its clients.
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The National Bankruptcy Conference appreciates the opportunity to
participate in these oversight hearings on executive compensation in
chapter 11 cases and thanks the Subcommittee for its invitation. The
topic is important to the administration of chapter 11 cases and
preservation of jobs and value for all constituencies and equally
important to maintaining fairness in reorganization. We commend the
Subcommittee for focusing on this issue in its review of the 2005
bankruptcy amendments.
The Conference is a voluntary, non-profit, non-partisan, self-
supporting organization of approximately sixty lawyers, law professors
and bankruptcy judges who are leading scholars and practitioners in the
field of bankruptcy law. Its primary purpose is to advise Congress on
the operation of bankruptcy and related laws and any proposed changes
to those laws. Attached to this statement is a Fact Sheet about the
Conference, including a list of its Conferees. Also attached is a
Background Report on Executive Compensation Issues that was prepared by
the Conference's Employee Benefits and Compensation Committee (the
``Background Report'').
Executive compensation has occupied headlines recently, and not
just in bankruptcy cases. See Background Report, at [28-32];
``Transparency: Lost in the Fog,'' New York Times, Apr. 8, 2007, at
BU1. In chapter 11 cases, the principal focus has been on retention,
severance and incentive plans, especially since the 2005 addition to
the Bankruptcy Code of section 503(c). This section, which was added by
section 331 of the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005,\2\ imposes restrictions on the ability of a chapter 11
trustee or debtor in possession to implement retention, severance, or
incentive compensation plans for its ``insiders.'' \3\
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\2\ Pub. L. 109-8, Sec. 331, 119 Stat. 23, 102, (2005).
\3\ ``The term `insider' includes--
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. . .
(B) if the debtor is a corporation--
(i) director of the debtor;
(ii) officer of the debtor;
(iii) person in control of the debtor;
(iv) partnership in which the debtor is a general
partner;
(v) general partner of the debtor; or
(vi) relative of a general partner, director, officer,
or person in control of the debtor;''.
11 U.S.C. Sec. 101(31).
To start, a definition of terms might be helpful to an
understanding of the issues that section 503(c) presents. In common
parlance, retention plans usually involve payments to employees who
stay with the company for defined periods of time, even if their
employment is not terminated. Retention plans are designed to give
employees an incentive not to seek employment at another firm even
though they may not be threatened with imminent loss of their jobs.
Another job at a healthy company, even at reduced compensation, might
seem more attractive than remaining with a chapter 11 debtor in
possession, where employees face the stress and difficulty of operating
a company in chapter 11 and the ultimate risk of being fired due to a
reduction in the company's labor force or even liquidation of the
enterprise.
A severance plan involves payments to employees upon the company's
termination of their employment to cushion the impact of losing their
job and to provide them time to seek alternative employment. In the
bankruptcy environment, where, for many employees, the prospect of
termination is on the immediate horizon, severance plans also serve the
goal of retention by discouraging employees from seeking to leave the
company in advance of being laid off. A severance plan is particularly
appropriate where employees know they will be ``working themselves out
of their jobs,'' for example, by overseeing a liquidation or sale of
the company. The better the employees perform in the liquidation or
sale process, the faster they lose their jobs. All constituencies
benefit from a swifter conclusion to the process. Retention and
severance plans thus serve a common purpose in chapter 11 cases--
keeping employees from seeking other employment for as long as the
debtor company needs them.
An incentive plan, by contrast, is designed to motivate employees
to achieve financial or other performance targets. The targets might be
ordinary operating performance targets or targets relating to the
reorganization or liquidation of the company. Although the incentive
compensation will not be paid if the employee leaves the company before
the relevant performance target has been met (which discourages the
employees from leaving), an incentive plan's primary purpose is
enhanced performance, not retention.
Incentive and severance plans are common among companies not in
financial distress and often are required for a company to provide
competitive compensation for middle and senior managers. See In re
Pliant Corp., Case No. 06-10001 (MFW) (Bankr. D. Del. Mar. 14, 2006)
(prepetition incentive plan). Retention plans, though less common in
the non-distress context, are also sometimes seen.
Properly designed, all three kinds of plans can enhance the
viability and value of a business, and can serve a proper purpose in
business in general and in reorganization cases in particular. See In
re AirWay Indus., Inc., 2006 WL 3056764 (Bankr. W.D. Pa. Oct. 3, 2006)
(secured creditor underwrote incentive plan out of its own collateral
proceeds to motivate employees to produce better recoveries). In
chapter 11 cases, properly designed plans can be in everyone's interest
because they preserve the business and jobs, and, ultimately, enhance
creditor recoveries.
The difficulty, however, lies in ensuring that such plans are used
in an appropriate way and are not excessive in light of their
legitimate purposes. There is an obvious risk that such plans will be
designed by managers to enhance their own compensation and will be more
generous than strictly necessary to preserve the value of the business.
While this risk exists at a non-bankrupt company, in a bankruptcy
company, where other employees are being terminated or being asked to
make sacrifices and creditors are incurring significant losses, there
is a heightened concern over both unfairness and corporate waste.
In view of this potential for abuse, the National Bankruptcy
Conference believes that bankruptcy procedures should be designed so
that retention, severance, and incentive plans in chapter 11 cases are
tailored to their legitimate objectives--preserving the debtor's
business and enhancing its value--but are not excessive. In designing
such procedures, however, care must be taken not to sweep so broadly
that appropriately tailored retention, severance and incentive plans
are impossible to implement. If the standards for authorization of such
plans are too rigid or impractical, the goals of reorganization,
preservation of jobs and enhancement of value may be thwarted, or,
perhaps worse, parties will have an incentive find creative ways of
circumventing the rules to meet the economic needs of the business. The
Conference believes an appropriate balance must be struck.
Section 503(c) ostensibly was designed to address the unfairness
and waste issues by limiting overly generous ``pay to stay'' packages
for the executives who themselves are setting the payments. However, in
its current form the provision can be criticized on a number of
grounds.
To start, the section imposes impractical requirements. It permits
retention plans only on an employee-by-employee basis, because it
requires a showing as to the unique circumstances of each employee that
would be covered. It applies only when an employee already has ``a bona
fide job offer at the same or greater rate of compensation'' and when
the services of such employee are ``essential to the survival of the
business''--requirements that are unlikely ever to be met. If an
employee sought out and received such a ``bona fide job offer at the
same or greater compensation,'' it is unlikely the employee would
choose to await the outcome of a hearing on a retention plan before
deciding to accept the other offer. The ``bona fide job offer''
requirement defeats the principal purpose of a retention program, which
is to keep employees from seeking other employment in the first place.
The ``essential to survival'' requirement is difficult to meet in a
moderate sized to large company, because the loss of any given employee
will seldom be a genuine threat to the company's ultimate survival. The
loss of a key employee may hurt the company, and the loss of a large
group of such persons may threaten the company's survival, but it will
be almost impossible to show that retaining a single individual is
``essential to survival of the business.''
Even if these facts could be shown, the section takes a formulaic
approach to what payments may be made. This ``one size fits all''
approach limits the ability of the debtor in possession to design a
retention program that is responsive to the needs of its operations,
employees and competitive environment so that the objectives of the
program to retain key employees can be achieved.
The section is also overbroad compared to the principal problem it
was intended to address--senior executives lining their own pockets
while other employees suffer. It can be read essentially to restrict
even legitimate and necessary retention and severance programs for mid-
level managers who have no control or influence over their own
compensation but who can often provide substantial value to a company
in distress if they stay and do their jobs.
Finally, ambiguities in the provision generate distracting and
destabilizing litigation at the delicate early stages of a chapter 11
case over the distinction between prohibited ``retention'' plans and
permitted ``incentive plans,'' as well as over who is an ``insider''
covered by the section, and who is not. Such litigation highlights to
employees the uncertainty of their status just when the company has an
urgent need to calm its workforce due to the initial shock of the
bankruptcy filing.
These and other effects of section 503(c) are described in greater
detail in the Background Report submitted with this testimony and in
the ``Memorandum on the Impact of Section 503(c) of the Bankruptcy Code
and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
on Executive Compensation,'' adopted by the Executive Compensation
Committee of the American College of Bankruptcy, which we understand
has been submitted to the Subcommittee for inclusion in the record of
this hearing.
Despite its flaws, however, there is no question that section
503(c) has served the salutary purpose of sensitizing courts,
creditors, and U.S. trustees to the issues of inappropriate executive
compensation packages and has properly shifted the compass toward a far
more reasonable approach to the issue. The National Bankruptcy
Conference would suggest, however, that in the interest of all
participants in the reorganization process, especially the debtor in
possession's non-management employees, a more nuanced and balanced
approach to executive retention issues is needed--an approach that
preserves the new law's salutary effects, but also takes into account
other important chapter 11 policies, like preserving and maximizing the
value of a reorganizing debtor's business.
Our reorganization laws are premised on the idea that the value of
an enterprise as reorganized often will exceed its liquidation value.
Reorganizing permits the company to improve its operations, enhance its
value, preserve jobs, and reduce sacrifices that need to be made by all
constituencies. As this Committee recognized in proposing chapter 11 30
years ago:
The purpose of a business reorganization case, unlike a liquidation
case, is to restructure a business's finances so that it may continue
to operate, provide its employees with jobs, pay its creditors, and
produce a return for its stockholders. The premise of a business
reorganization is that assets that are used for production in the
industry for which they were designed are more valuable than those same
assets sold for scrap.\4\
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\4\ H. Rep. No. 595, 95th Cong. 1st Sess. 220 (1977); see NLRB v.
Bildisco & Bildisco, 465 U.S. 513, 527, 104 S. Ct. 1188, 79 L. Ed. 2d
482 (1984) (``the policy of Chapter 11 is to permit successful
rehabilitation of debtors''); United States v. Whiting Pools, Inc., 462
U.S. 198, 203, 103 S. Ct. 2309, 76 L. Ed. 2d 515 (1983) (``Congress
presumed that the assets of the debtor would be more valuable if used
in a rehabilitated business than if sold for scrap.'').
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The objective of maximizing the value of the enterprise is distinct
from the question of how that value, once maximized, should be
allocated among creditors, shareholders, employees, and other
stakeholders. It is proper to ask whether the value of the enterprise
is being equitably distributed, but it is self-defeating if the method
of effecting an equitable distribution among the parties reduces the
value that is available to distribute. Generally speaking, therefore,
issues of equitable distribution should be resolved only after
appropriate steps have been taken to preserve and maximize the value of
the business. The Bankruptcy Code was designed to facilitate such
maximization (for example by permitting sale of unproductive assets,
assumption of beneficial contracts and rejection of burdensome ones)
and to encourage negotiations over the equitable distribution issue,
with ultimate recourse to the court if the distribution issue cannot be
consensually resolved.\5\
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\5\ See Richard Broude, Cramdown and Chapter 11 of the Bankruptcy
Code: The Settlement Imperative, 39 Bus. L. 441 (1984).
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Labor issues in general, and executive retention and severance
plans in particular, pose difficulties in the chapter 11 context
because they typically intermingle and often create a conflict between
the equitable allocation of sacrifice among employees and other
constituencies on the one hand and the objective of maximizing
reorganization value on the other. The Conference believes, however,
that these apparently conflicting objectives can in fact be reconciled
in the case of executive retention, severance, and incentive plans if a
somewhat different approach from the one taken in section 503(c) is
adopted. In the view of the Conference, this approach should take into
account several basic principles:
First, the approach adopted should recognize that
each case presents a unique combination of demands on
management, employees, and creditors, and that a one-size-fits-
all formula to address executive retention and severance is too
constraining to accomplish the bankruptcy objectives of
maximizing value of the debtor's business and preserving jobs.
Second, the approach adopted should also recognize
that, for the vast majority of employees--those who do not
control decisions relating to their own compensation--
appropriate retention, severance, and incentive plans are
matters that should be resolved by negotiation between the
debtor in possession and the stakeholders in the case.
Third, the approach adopted should assure relevant
parties adequate time to familiarize themselves with the
underlying facts and needs of the business and to negotiate and
resolve the issues or put them before the bankruptcy court.
Finally, the approach adopted should address the
basic fairness issue: preventing a limited number of senior
management decision makers to reward themselves by designing
for themselves excessively generous retention and severance
arrangements while other employees and creditors are being
called upon to accept sacrifices.
The NBC suggests two principal changes from current law that would
help implement these principles:
First, procedural limitations should be imposed to
prevent adoption of compensation plans for senior officers of
the company at such an early stage in the case that the
constituencies (including those representing hourly employees)
are not yet ready to participate in the negotiation of
reasonable and balanced solutions. Any proposed program for
senior officers should be debated by the parties and considered
by the bankruptcy court in broad daylight and only after all
key constituencies have had the opportunity to scrutinize the
program and express their views. A reasonable minimum notice
period should be imposed to allow a creditors' committee to be
formed and to provide the committee and other parties a fair
opportunity for review of the proposed program, and, if
agreement is not reached, for there to be a fair opportunity
for the parties to be heard before the court.
Second, limitations on retention, severance, and
incentive plans like the ones in section 503(c) should be
specifically targeted against those senior executives who are
in a position to make self-serving compensation decisions, and
a more traditional business judgment test, which focuses on
preservation of the value of the business, should be applied to
authorization of such plans with respect to other employees.
The reasons for this more targeted approach are straightforward. A
large company may have dozens of officers, such as vice presidents, a
treasurer, a controller, and assistant vice presidents and treasurers,
elected to officer positions by the board, who might be considered
``insiders'' covered by the current limitations in section 503(c). The
real risk, however, of over-reaching, over-compensation and abuse lies
not with this larger group of employees, but rather with the senior
executives who play a role in setting compensation, usually the chief
executive officer and a few other top executives.
The SEC has addressed this risk in the non-distress context by
requiring disclosure of compensation of the top five most highly
compensated executive officers. See Item 402(a), SEC Regulation S-K.
This group generally would not include, for example, the star sales
manager, the key engineer, the plant manager or the like, who may
technically be an ``officer'' or ``insider'' of the company but who has
no role in setting compensation. Adoption of the SEC dividing line to
determine whose compensation is subject to heightened scrutiny in a
chapter 11 case would help to assure fairness and avoid abuse, while at
the same time not placing at excessive risk the important bankruptcy
objectives of preserving the business, enhancing its value and
ultimately increasing the likelihood of a successful reorganization
that will minimize the hardships to be borne by all parties.
Limiting the restrictions of section 503(c) to the senior
executives in control of compensation decisions will permit debtors in
possession, where necessary and appropriate, to offer the incentives
necessary to keep key middle managers and star performers focused on
their jobs, without generating expensive, time-consuming, and
distracting litigation. The process would likely be self-regulating and
self-limiting, because CEO's and other senior executives are unlikely
to propose excessive compensation for mid-level officers or junior
employees if they are prohibited from providing excessive compensation
for themselves. Regulating the top of the compensation pyramid is the
best way to assure that other employees are offered only what is
genuinely necessary to retain their services in the interest of the
business.
Once again, I would like to thank the Chair and the rest of the
Subcommittee for inviting the National Bankruptcy Conference to testify
in these important hearings. The Conference would be pleased to
consider this issue further if the Subcommittee desires, and we would
be prepared to formulate detailed drafting proposals if the
Subcommittee would find that helpful.
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Ms. Sanchez. I should also mention before we move on to a
round of questions that Glenn Tilton, the chairman, president
and chief executive officer of United Airlines, was invited to
testify at this hearing today but declined to do so and I think
that is really a shame because if he were able to be here he
perhaps would have had testimony that could have been
enlightening as to the equitable considerations that are
warranting this hearing on executive compensation.
It has been suggested that I subpoena him. We try to do all
things with restraint and voluntarily.
We are now going to proceed with a round of questions
subject to the 5-minute rule. I just want to warn the witnesses
that we each will have limited time, as you did, in which to
ask questions, so if you could be brief and concise with your
answers, that would be helpful. It would allow Members time to
ask the questions that they want to ask of the various panel
members.
I will begin the round of questioning starting with Mr.
Silvers.
The Office of the United States Trustee is required to
supervise the administration of Chapter 11 cases and object to
compensation requests pursuant to section 330 of the Bankruptcy
Code where appropriate. In your opinion, do you think that the
United States Trustee could play a more active role in policing
excessive compensation requests?
Mr. Silvers. I will give you a very brief answer. Yes.
I think that this is an example of the sorts of procedural
protections that Mr. Levin referred to. And I think it is one
of many areas in which the message throughout our Government in
recent years has been to indulge inequalities of wealth rather
than to police them.
Ms. Sanchez. And if you can, can you please explain for me
the difference between a retention bonus and incentive pay?
Mr. Silvers. Well, as a business matter, right, there is a
notion that a retention bonus is designed to keep you at your
desk and incentive pay is designed to make you do certain
things while you are sitting there. I think this is a
distinction of limited merit, frankly.
I fully understand, I think the AFL-CIO fully understands,
that the politics of 2005 in terms of moving legislation
through, promoted this notion that what we care about is this
type of pay rather than that type of pay. I think the concern
here is one of amount, but more importantly the real concerns
here are not this distinction, which can be completely gamed
and has been and will be again.
The real issues are twofold. One is simply the question of
fairness, of amounts, of what is happening to people. But the
more important question is the question of what we are
incentivizing executives to do. The current system is one in
which if you were sitting at your desk as an executive with a
company that is not bankrupt and you were thinking about
bankruptcy as a strategy, as a strategy for reneging on long-
term promises made to long-term employees, you can do so today
in the relatively certain knowledge that you personally will
not only not suffer as you will make others suffer, but that
you will actually profit by doing that. And that is really the
heart of what we see as the problem here.
Now, again, we think that the solutions lie more in what
Mr. Levin was talking about, procedural devices of various
kinds, than in absolute caps or bars, for the very reason Mr.
Levin said, which is that absolute caps or bars are an
impediment to successful reorganizations.
Ms. Sanchez. Thank you.
Speaking of Mr. Levin, nice segue, Mr. Levin, you suggested
that limitations on compensation should be specifically
targeted against those senior executives who are in a position
to make self-serving compensation decisions.
How would you devise a solution to implement that
suggestion?
Mr. Levin. Well, as I said, the SEC Rule SK, I think it is
section 402 of that rule, lists the kinds of executives that we
would contemplate covering, and those are people like the CEO,
the executive vice president, COO. They have different titles
in every company, but they are the executive decision-makers
that are usually the most highly compensated.
You very often see in a company, the most highly
compensated individual is a sales manager because he gets a
commission on sales or she gets a commission on sales and does
just a phenomenal job selling the company's product. You don't
want to limit that person. But that person also has no ability
to affect his own or her own compensation. The executive, being
at the top of the pyramid, does, and that is where I think the
effect should be focused.
I will complete my answer with that. Thank you.
Ms. Sanchez. Okay, thank you.
And I am going to have one further question for you. As one
of the original drafters of the Bankruptcy Reform Act of 1978,
was it Congress's intent that Chapter 11 provide a level
playing field for the various constituencies involved in a
case? And with respect to labor interests, do you think unions
still have a level playing field for participating in Chapter
11 cases?
Mr. Levin. It was definitely intended that all parties be
given negotiating tools and levers to be able to sit at the
bargaining table. Everybody makes sacrifices in a Chapter 11. I
say everybody. Suppliers who sell goods after Chapter 11 get
paid in full for the goods they sell. They are not making
sacrifices. They are benefiting by being able to continue to do
business. But if you don't pay them, they won't ship. It is
that easy.
But generally speaking, everybody is asked to make
sacrifices, and there is intent to create a level playing field
and some balance in the bargaining power. It never can be
completely equal, but you try to create some balance.
If anybody has a veto and has a right to walk away from the
table, there is no need to negotiate, because that person can
dictate terms. And it is hard to say exactly where that balance
is, and it keeps getting readjusted every few years, and we
hope Congress will continue to maintain that balance, because
that is what drives consensual and therefore successful
reorganizations.
Ms. Sanchez. Thank you, Mr. Levin.
I would now like to recognize the Ranking Member of the
Subcommittee, Mr. Cannon, for 5 minutes of questions.
Mr. Cannon. Thank you, Madam Chairman.
Congressman Keller has asked me to ask unanimous consent to
submit for the record the proxy statement with a cover letter
from Mark Anderson, who is, I think, the vice president for
governmental affairs of United Airlines.
Ms. Sanchez. Without objection, so ordered.
[Note: The information referred to is not reprinted here
but a copy has been retained in the official Committee hearing
record.]
Mr. Cannon. I would like to thank you for this panel. This
is a very thoughtful panel, and we appreciate the input on both
sides of the aisle.
This is an initiative that Mr. Delahunt and I worked on in
the past and one that we need to focus us on. I always find it
interesting when Mr. Conyers and I are on the same panel. We
often agree, which may surprise some folks, but interestingly,
when you are philosophically clear it is a lot easier to agree,
because then you can actually talk about what can be done as
opposed to posturing.
And so I want to just thank Mr. Conyers for his kind words
and for the fact that we are able to be here today and looking
at some of the things that we can actually do about, what is
problematic, and it is problematic for reasons that you have
all said.
I think after hearing the panel and some of the questions
that the Chairwlady has asked, there is actually some consensus
on this. And after Mr. Levin's response and Mr. Silvers, your
response, it seems to me that there is some consensus that if
we have procedures, then the parties will be able to negotiate
and solve problems as opposed to having rigid tests or other
mandates.
Is that a fair conclusion, Mr. Silvers?
Mr. Silvers. Yes, I think that is. I think that what our
position is is that caps, for example, on pay here, is not
probably a wise way to proceed. And that the distinction
between incentive pay and retention pay has proven to be one
that can be gamed.
Mr. Cannon. Right.
Mr. Silvers. And so I think we agree there. I am not sure
we agree on what the procedures should be, but----
Mr. Cannon. Right, but the point is that at least we want
to have some flexibility there and that a process is going to
produce a better result than a rigid conclusion.
Let me just say, Mr. Levin, I really appreciate your long
history of work in this very difficult broader area and in this
particular area as well.
But, you know, I travel from here to Utah. I have lots and
lots of air miles. And I spend a lot of time talking to
stewardesses about this problem, mostly with Delta, but as you
spoke this morning, Ms. Muoneke, it occurred to me that I would
be interested in knowing whether you would prefer,
retrospectively, to have had instead of a defined benefit
pension plan a defined contribution plan. Have you thought much
about that?
Ms. Muoneke. I think personally, and in talking to my
fellow flying partners, that we would like to have a matching
plan. It would be in our best interest.
We did have one previously, but that was nullified by
United earlier in my career. I think the difference is that my
401(k) wasn't a plan that I had from the very beginning of my
career. This is something that was offered to us as a
supplement to our defined benefit pension plan that we all
thought we were going to have when we retired.
If I had the choice and had known a number of years ago
that I was going to have to rely solely on my 401(k), I would
have planned my retirement differently. I would have tried to
maximize my funding into my 401(k) instead of now playing catch
up, which is very difficult to do.
Mr. Cannon. Right. The problem here, and I feel very
sensitive asking you the question, because you are not back at
the beginning and you are stuck where you are right now.
In particular, you said that your hours were up 40 percent
and your pay is off $5,000. Is that $5,000 for the whole amount
of the extra time you are working, or is your net pay,
regardless of how many hours, less than what you were making
before?
Ms. Muoneke. To understand how our hours are, it is not as
in the general public. I, prior to 9/11 occuring, I was flying
75 hours a month. Now, 75 hours a month does not include my
total time away from home. That is just actual in-air flying
hours.
Now I am flying 100-plus hours per month, so that is quite
more hours per month that I have to fly, just to try to keep
myself on track to where I was prior to losing my pay and my
pension. But with my hours being up to what it is now, that
means that I am away from home a lot more. I don't have the
time to spend with my daughter. I have to rely on outside help
to get here to different places that I need her to go.
So it is just a difficult situation, not only for myself
but my colleagues. We are all facing the same crisis.
Mr. Cannon. Thank you. I appreciate your willingness to be
here today.
I see that my time has expired, Madam Chairman. I yield
back.
Ms. Sanchez. Thank you, Mr. Cannon.
Now it gives me great pleasure to recognize Mr. Conyers for
5 minutes.
Mr. Conyers. Thank you, Madam Chair.
I want to suggest to the Subommittee that I am trying to
examine the ways that we lift up all of the problems of the
witness that has testified here in her individual capacity. The
fact of the matter is there are hundreds of thousands of people
in her condition, and we need to get a record on this, whether
it is from the lawyers that represent them, the consumer
groups, additional groups coming in, but this story has to be a
part of the record, not necessarily the record of the
Subommittee but a record somewhere where we can repair to this.
We are not going to lift up one person's testimony and say
oh, that is really bad. There are lots of people out there that
are in that position, and I would like to invite Chris Cannon
and some of us to examine ways in which we can compile these
records.
The second thing, I wanted to extent my sympathies to Mr.
Wintner, whose plea for considering the poor executive who is
about to lose some compensation, may even lose his job, gosh.
Millions of people are being downsized, thrown out of work,
kicked around all over the place, and we have the
responsibility, you do, to come to us and tell us, but wait a
minute, we don't want you guys to go too far in the Congress,
but you have got to think about, this may worsen the plight of
the corporation.
Never once do you tell us about the incompetent executives
that brought the company to that position in the first place.
What do you do about them? Well, nothing. They frequently
benefit from their own inability to govern correctly.
And so I just want you to know that I am sympathetic about
executives. Man, let us be fair here. We haven't talked about
the difference between Government trustees and private
trustees, because the Government trustees at the Department of
Justice should sooner or later be a witness here, and I am
hoping that they do. I am getting it from a lot of judges and
private trustees, that they are all saying that the system is
tying the hands of the judges and they don't have any choice.
I don't know what is happening here at this hearing. I know
what I am hearing and being told and I know we are gong to have
some more hearings about this so that we can get to this
problem, but are the judges' hands tied? Something has got to
go on the record today.
Now, if we have to take Mr. Silvers' warning, that we are
going to get gamed again if we are not careful, I mean we will
abolish the distinction and we will do some great
legislatively-sounding great things, but it won't change the
practices and procedures that have emanated from that 2005
changes of the 1978 Bankruptcy Code. Much of that has gone out
of the window. We have got means tests now for consumers trying
to go into bankruptcy. We have got single parents, and here is
one, trying to raise a family by themselves, and they may end
up in a personal bankruptcy of their own. Forget the companies
and these executives.
So I see a great challenge and opportunity. That is why I
am so proud of this Subcommittee on the Judiciary. We are going
to take this thing apart, issue by issue, and organization by
organization.
And now I would like Mr. Wintner to join with me in the
sympathy for the other people that could be harmed in this
process.
[BUZZER]
Mr. Conyers. Go ahead.
Ms. Sanchez. I am going to request unanimous consent that
the gentleman be given 1 additional minute of time so that the
witness may respond.
Mr. Wintner. Yes, thank you Congressman Conyers and Madam
Chairman.
I actually represent various parties to Chapter 11s, in
some cases debtors, in some cases creditors committees, in some
cases individual creditors, in some cases ad hoc bond holders,
and many other parties. Almost never, at least in a Chapter 11,
do I represent the management in their capacity as management.
My creditor clients, and I am not speaking for anybody here
but myself, but obviously it is based on my experience, they
have no desire to overpay management. It is coming out of their
recovery. Their only interest in terms of retaining or
attracting management is simply one of self interest.
Mr. Conyers. I know you are not kidding me, are you?
Mr. Wintner. About which part?
Mr. Conyers. About the part that they have--here we have
examples before you of incredible, unjustifiable excesses, and
the next thing you tell me after we have taken 5 minutes on
this is to say they have no interest in giving undue
compensation to the top executives.
Mr. Wintner. They do not. And in fact, I would support the
position stated by the other panelists as well as Members of
the Subcommittee, that any procedural improvements which give
all parties to the Chapter 11 a say in that executive
compensation----
Mr. Conyers. But what about the incompetent ones?
Ms. Sanchez. The time of the gentleman has expired.
If you would like, we can do a second round of questioning
in which you will be allowed to continue with your question,
Mr. Conyers.
At this time, I would like to recognize Mr. Franks for 5
minutes of questions.
Mr. Franks. Well, thank you, Madam Chair. And it is always
interesting to come to the Committee.
Madam Chair, it appears to me that the challenge here
sometimes is more basic than some of our examination here might
indicate.
When we try to place at odds the executive of a company
with the employees of a company, sometimes it becomes--we are
focusing the entire effort, I think, on the wrong question. If
our only concern were the employees of a company, if that were
our only concern, and a company was having a challenge
economically, would it not be in the company's best interest to
try to use whatever market mechanisms necessary to bring in the
very best possibility of preventing that company from failing
entirely and being a complete loss, both economically, in terms
of the job, and the potential benefits for retirement to those
employees?
And I know that the challenge here for the courts and for
us is to be able to separate that process, of trying to incent
the greatest leadership for a company and what those
compensation packages should look like, and those who would
deliberately game the system and, like Mr. Silvers said, try
to--that they would be literally incented to try to hurt the
company and lead it into bankruptcy for some of their own
financial reasons. That seems to be the challenge for me.
So I guess, Mr. Levin, if I could start with you, what are
your key criticisms of the KERP's provisions? And if you could
outline for us how the court's struggle with this dynamic. You
know, they are trying to maintain a market-driven system here.
I mean, the Soviets didn't have that. Everybody got paid the
same, and it didn't work too well. So they want to try to
maintain the market system here, and yet they want to keep
people from gaming the system. How do they come up with that
balance?
Mr. Levin. How do the courts come up with that balance?
Mr. Franks. What issues do you think are the key ones that
the courts struggle with?
Mr. Levin. I think what we have seen in the practice under
section 503(c) since it was enacted is that where there is
broad agreement among the constituencies in the case, on what
the executive compensation should be, the courts generally
approve the agreement. And when there is not agreement, the
courts generally do not.
There is nothing in the law that says that is how it is
supposed to work, but on the ground, I think if you look at the
background report that the National Bankruptcy Conference
submitted with our testimony here, I think you can trace
through those cases and see that that is in fact what happens.
And I think that is consistent with the level playing
field, Chapter-11-is-an-invitation-to-a-negotiation concept
that Congress built into the process 30 years ago. I think that
is what is going on.
In terms of the actual problems, one of the problems that I
mention is that 503(c) sweeps too broadly. It sweeps too far
down into the organization with key performers, important
people, as I mentioned, people such as Mr. Allen, that Mr.
Silvers mentioned, where there are no abuses, there have been
no abuses. And that would be one change that we recommend.
And the other is to impose the procedures and the measured
process that allows people to get to the negotiating table and
get agreements.
Mr. Franks. Well, Mr. Levin, let me try to expand on that
just a little.
Just a hypothetical situation. If you have got a company, a
large, say, airline company, that has through incompetent
leadership come to the point where they are in dire trouble,
and you are only concerned about maintaining the company for
the sake of the employees, what impediments are reasonable to
say to that company, well, there are only a few people out
there that can turn this around, and that is a highly
competitive market out there for these people, but we are going
to say to you that you can't hire them except under these
conditions.
What impediments are reasonable? Shouldn't we pull out all
stops to save the company?
Mr. Levin. Again, as I said earlier, pulling out all stops
runs the risk of allowing one constituency to dictate the
outcome. The other constituencies who participate in the
negotiation process understand what you just said, that you
need good people to try to save the business. And that you
don't attract new management, assuming you had bad management,
you want new management, you don't attract new management by
paying way under-market.
So there is a balance. We hope that by attracting new
people it will increase the overall value of the company and,
therefore, diminish the pain that has to be shared among the
various constituencies. But I don't think you can do that with
a one-size-fits-all rule. It has got to be people understanding
what their interests are, whether it is creditors or employees,
understanding that new people, new management, can improve the
situation, and that ought to be pursued without excess.
But define excess. It is, ``how high is the sky?'' You
can't define excess in general. It has to be case specific.
Mr. Franks. Thank you, Mr. Levin.
Thank you, Madam Chair.
Ms. Sanchez. The time of the gentleman has expired. Thank
you.
I would like to recognize at this time Mr. Johnson for 5
minutes.
Mr. Johnson. Thank you, Madam Chair.
Now, no doubt that there have been numerous documented
instances of corporations that have been mismanaged by high
paid, excessively, obscenely paid, executives, and then that
corporation may find itself in bankruptcy, where the issue
becomes whether or not there will be a liquidation or whether
or not there will be a reorganization.
And, of course, when there is a liquidation, it means there
is a cessation of the operations of the business, the creditors
lose, the workers los, anybody who has ongoing relationships
with the business loses. And then if there is a reorganization
proposed, then there is a chance for the business to remain
viable and perhaps be able to pay back either all or a
percentage of its creditors and, of course, be able to pay its
employees as it continues to operate.
Certainly a reorganization is probably better for all
concerned, including the workers, than a liquidation. And in
the case of a reorganization, then the issue becomes how much
do you pay the executives to run the company and try to get it
out of Chapter 11 and back to viability. And so executive
compensation, how much do we pay the executives to lead the
company out of bankruptcy, and I believe that that is one of
the issues that we are here to address today.
And I have heard some comments, that we should have some
limitations on compensation, and I have also heard that caps
are not a solution. So if I could hear from each one of you as
to your opinion about limitations on compensation, does
everybody agree that there should be limitations on
compensation during a reorganization? If so, what does the--
what impact does that have in terms of the business's position
in the overall marketplace?
And, number two, if you should have limitations on
compensation, how can that be accomplished?
Mr. Silvers?
Mr. Silvers. The AFL-CIO would like two specific things
done in this area as part of the broader examination that Madam
Chairwoman described as an effort to restore balance as a whole
to the bankruptcy system.
The two specific things we would like are, one, the
extension of broader review powers over executive comp from the
KERP area, where we only look closely at retention, to look at
the package as a whole, because of this issue of judges feeling
like their hands are tied.
Secondly, we want executives who are contemplating making
war on their employees, doing to people what was done to Ms.
Muoneke, we want them before bankruptcy to realize that if they
do so, what they do to others will happen to them. And that is
the second principal we want embodied in law, and it is not a
principal about how do you review comp after the fact, it is
about what you have to think about beforehand when you are
thinking about hurting other people in the way that hundreds of
thousands of American workers have been hurt in this process.
Mr. Johnson. Okay. Do unto others as you would have them do
unto you, perhaps, as a system of imposing that.
Mr. Silvers. Pretty much.
Mr. Johnson. Let me ask, Mr. Levin, your position, and then
Mr. Wintner, and then if you have got anything that you would
like to say on that, Ms. Muoneke.
Mr. Levin. The National Bankruptcy Conference I think would
not favor any limits on compensation per se. They are too hard
to define. One-size-fits-all does not work.
I think our focus is more on making sure that executives
are not in a position to line their own pockets, that the
process prevents that, through the negotiation process and
court supervision, imposing reasonableness standards.
You can't define what is reasonable in any particular case
without understanding the facts.
Mr. Johnson. Does the law enable that process to take place
right now or do we need some revisions of the law?
Mr. Levin. I think revisions would be appropriate. I think,
as I noted----
Mr. Johnson. To give the judges more authority to gauge
exactly how?
Mr. Levin. Well, right now the law permits incentive plans
under a very broad standard and it effectively prohibits
retention plans. And we think those could be brought more into
balance.
Incentive plans are useful because if they work, people
actually perform.
Mr. Johnson. All right.
Ms. Sanchez. The time of the gentleman has expired.
I would now like to recognize Mr. Cohen for 5 minutes.
Mr. Cohen. Thank you, Madam Chair.
Before I start, I would like to yield as much time as he
desires and needs to the honorable Chairman of this Judiciary
Committee, Mr. Conyers.
Mr. Conyers. Well, that is very kind of you, Mr. Cohen.
Mr. Levin, would you share my concerns, please, because all
this emphasis on negotiation sounds very fair. Well, guess
what? The corporations have a huge advantage sitting across
from the union representatives because they will say, ``Look,
guys, if you don't go along, guess what? We are going to
liquidate.'' And that is what they are doing now and that is
what they will be doing after all this talk about fair
negotiations is over with.
And I thank my colleague for yielding.
Mr. Cohen. Thank you, sir.
Mr. Levin, is there a system right now where if something
shocks the conscience of the court, the court is supposed to
act?
Mr. Levin. Yes. The court has the unquestioned authority to
disapprove a transaction that is completely outside the bounds
of reasonableness. I think the standard that would--I am having
trouble coming up with the exact standard that the courts use,
but certainly shock the conscience would get there.
Mr. Cohen. How often does that occur? What percentage of
cases, do you think?
Mr. Levin. Well, since most of the cases where the court
approves things--we are talking the executive comp area or are
we talking more generally?
Mr. Cohen. Executive comp.
Mr. Levin. Okay. In the cases where the courts have
approved things since the enactment of 503(c), there has been
general agreement among the parties in the case, and so we
haven't seen a situation where the court has approved something
that one might say shocks the conscience, because there maybe
disagreement about how reasonable it is, but it is not up to
that standard and there is, as I said, objections and the comp
plans have been withdrawn and the courts have approved.
The courts have disapproved where there has not been
consensus, even on matters that don't quite shock the
conscience but just are outside some bounds of reasonableness.
Mr. Cohen. Mr. Silvers, you brought to our attention Mr.
Cooper and his turnaround for Enron, and I hate to say it, I
guess in this room I talked about having some stock in one of
those companies that kind of went south on the radio, I guess
it was Sirius, and I had Enron too, so I am not real thrilled
about his $100 million or whatever.
Did anybody object to his compensation?
Mr. Silvers. Yes, in fact this is one instance where the
U.S. Trustee objected to the final $25 million, it got cut in
half, so it ended up being a final bonus of $12 million in the
Enron case. But right at the margin, right.
And let me extend my condolences on behalf of the 10
million AFL-CIO members, pretty much every one of whom in some
fashion or another also owned Enron.
Mr. Cohen. What was Mr. Silvers' hourly compensation--Mr.
Cooper's, I am sorry.
Mr. Silvers. Well, it is hard to say. He came in, and I
think, because we don't actually know actually what he
individually got out of this--he came in in December of 2001
and he was there, I think they were still doing it, it was in--
it took several years. I forget the--it was 2 or 3 years.
If you figure he worked a hard couple of years, that he was
at work, oh, maybe twice as much as most of us are, so 10,000
hours a year--no, that is 4,000 hours a year, say 3 years, that
is 12,000 hours. You are talking about a very large number.
$100 million divided--$10,000 an hour I think it comes out to.
Mr. Cohen. But did he bill an hourly rate or did he just
bill a gross rate for his services?
Mr. Silvers. Again, I think this is--let me edit what I
just said. That is for the firm. We don't know--I couldn't tell
you how many people, I am sure it is in the court record, were
compensated as a result of that $120 million.
What we do know is that following this engagement, Mr.
Cooper, who by the way, I don't mean to suggest he is a bad man
or a crook or anything like that. He was a businessman, he went
and did the job, he got paid. But he got paid an enormous
amount of money, and the measure we have of that is that he was
able to, in the most expensive real estate market perhaps in
the world, he was able to buy one of the most expensive
properties. And I think that tells us something about sort of
what the pay out was at the end.
Ms. Sanchez. The time of the gentleman has expired.
I am going to enquire of the members who are still present
if there is interest in a second round of questioning. I know I
have a couple more questions I would like to ask, if anybody
else is interested in asking questions? If not, I will just ask
unanimous consent to--I would like unanimous consent for 3
additional minutes to ask questions.
Without objection, so ordered.
Mrs. Muoneke, can you tell us some of the concessions that
the employees were forced to make as a result of going into the
Chapter 11 bankruptcy? Some of the things that you guys gave
up?
Ms. Muoneke. The bulk of our concessions, other than
pension, was work rules. Work rules is, like they govern our
job at United, and we have had to give up quite a bit with
that, which means we are working longer hours, our job
responsibilities have increased two-fold, but we are paid less
than what we were paid prior, but we are expected to do twice
the amount of what we were initially--what our job description
had initially set out for.
And job rules may not be a major thing to you, but for us,
it is everything for us.
Ms. Sanchez. I am sure it governs childcare and numerous
other issues.
Mr. Levin, I am interested, and I think Mr. Conyers made an
excellent point about feeling sorry for the poor, beleaguered
executive when we hear testimony about what the real rank and
file worker gives up when they are making sacrifices for the
company and the sacrifice doesn't seem to be equaled by those
at the top, who always seem to be taken care of in one respect
or the other.
I am interested to ask, Mr. Levin, do you think an airline
can continue to exist without dedicated rank and file employees
who do the day-to-day of the airline?
Mr. Levin. As Mr. Cannon said earlier, I too fly quite a
lot, and I rely very heavily on those dedicated employees who
are good at their jobs and careful in protecting our safety and
our comfort while we are en route. They are critical.
Ms. Sanchez. Would it be safe to say that in the Chapter
11, yes, there is concern that you want to keep good management
around, but shouldn't there also be an equal concern that you
keep good employees around who will continue to make the
business a going concern?
Mr. Levin. There is no question about that. I don't want to
frame this, though, as a zero sum game.
Ms. Sanchez. I understand that. I think everybody was
interested in making sure that the airline continued in
business, because if not the rank and file sure don't get paid,
nor do the executives. Although it seems to me that the way
things are structured, which we have an inordinate amount of
concern for keeping good management, but we don't have that
same and equal concern about keeping good rank and file
employees.
I mean, correct me if I am wrong, but usually in
restructuring or in bankruptcy, one of the things that they
tend to do is slash jobs and then give bonuses to executives
because they are making the company leaner. I mean, who is
bearing the bulk of the sacrifice in that scenario?
Mr. Levin. You are right. It is a very difficult question.
We want to protect jobs. That is what Chapter 11 is about.
Companies sometimes over-expand, and the only way you can
get them healthy again is by cutting them back. You can't cut a
company back by keeping all of its suppliers, all of its
workers, all of its other obligations, in an overexpansion
situation. That is got to be done in the most humane and
constructive way possible, in a way that is going to preserve
the best value of the company for the stakeholders there.
I don't question that at all, that that is an important
consideration in Chapter 11. But to try to preserve a company
as it is when it went in, if it were healthy enough to do that,
it wouldn't have needed to go into bankruptcy.
So it is difficult to sit here and dictate a balance that
makes that work. All of those factors must be taken into
consideration.
We are not arguing that there is any particular sympathy
for the executives.
Ms. Sanchez. I understand that.
Mr. Levin. What we are simply saying, is like I mentioned
earlier, the suppliers, if you tell suppliers that are shipping
fuel to the airline, sorry, we are only gong to pay you 50
percent of the market price of the fuel, they will go sell
elsewhere. And we want to keep the employees, but we don't want
management to say--maybe in an industry like airlines there
aren't other jobs and you don't need to worry about keeping
them in a very--in an area where there is a very competitive
labor market at the executive level.
It is not a question of concern for the executives. It is a
concern to fill those jobs rather than having employ slots.
Ms. Sanchez. I understand that. I am just simply trying to
point out the fact that there seems to be an inordinate amount
of time and attention that is focused on preserving jobs or
preserving executive positions, and less so on the rank and
file members who can be let go summarily and, you know, who
have already made concessions with respect to pension benefits
or health care benefits or even wage or hour benefits. And you
know, they are let go and nobody really cries, for them in the
end. At least we are not looking to retain--we are not so
focused on retaining those employees.
It seems to me that there is an imbalance in terms of how
the value of each of their work is viewed.
Mr. Conyers. Madam Chairman?
Mr. Levin. I didn't mean to suggest that at all, Madam
Chair. So if I did, I apologize.
Ms. Sanchez. I understand.
Yes?
Mr. Conyers. Madam Chairman, would you yield for just a
momentary observation?
Ms. Sanchez. My time has expired, but I will unanimously
recognize you for 1 minute, Mr. Chairman.
Mr. Conyers. All right, thank you.
You know, gentlemen and lady, you know what bothers me,
frankly? When you lay off a multi-millionaire and you lay off
somebody making $40,000 a year, there is one hell of a
difference. A person, an executive who loses his job, the worst
thing that can happen to him, he is already wealthy. He is
already in the top 1 percent, over $100,000 a year.
So to even pretend that losing an executive's job is the
same as Ms. Muoneke losing her job doesn't even compute.
Ms. Sanchez. Thank you, Mr. Conyers.
I am also going to ask unanimous consent to include in the
record additional statements by Patricia Friend, who is the
international president of the Association of Flight
Attendants.
Without objection, it is so ordered.
[The prepared statement of Ms. Friend can be found in the
Appendix.]
Ms. Sanchez. There being no more questions, we would like
to thank all the witnesses again for their testimony today.
Without objection, Members will have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses and ask that you answer in as prompt a manner
as you can, and those responses will also be made part of the
record.
Without objection, the record will remain open for 5
legislative days for the submission of any additional material.
Again, I want to thank everybody for their time and
patience at this hearing of the Subcommittee.
This hearing of the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 12:01 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Stephen I. Cohen, a Representative
in Congress from the State of Tennessee
I am interested in hearing from the witnesses regarding whether
Congress needs to take legislative measures to address the practice of
Chapter 11 debtors using sometimes-exorbitant ``incentive'' packages
for their executives, particularly when those same debtors impose
enormous financial hardships on their employees in the name of
achieving a financial recovery. Congress has already addressed its
concern regarding high executive compensation given by Chapter 11
debtors to their executives as retention compensation. It may be time
to take a similar approach with respect to incentive-based
compensation.
News Release concerning American Airlines Flight Attendants'
Nationwide Protest
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Submission entitled ``2003 Sacrifices from AA Flight Attendants
Restructuring Agreement''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Submission entitled ``American Airlines Flight Attendant Facts''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Submission entitled ``APFA FACTS On American Airlines Executive Bonus
vs Employee Concessions''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Patricia A. Friend, International President,
Association of Flight Attendants--CWA, AFL-CIO
Chairman Sanchez and members of the subcommittee, thank you for
holding this timely hearing and exposing a troubling trend that
threatens to erode the great American middle class and damage workers
confidence in our economic system.
My name is Patricia A. Friend and I am the International President
of the Association of Flight Attendants--CWA (AFA-CWA), AFL-CIO. AFA-
CWA represents over 55,000 flight attendants at 20 different airlines
throughout the United States and is the world's largest flight
attendant union.
When companies enter bankruptcy, employees are the first to suffer
the consequences as management demands drastic pay and benefit
reductions. To add insult to injury, management then shops for
potential investors, using their employees reduced standard of living
as a selling point in hopes of exiting bankruptcy with large sums of
fresh capital. Employees then scrimp to get by as management gouges on
new investments and rewards themselves outrageous bonuses.
Can you see why employees feel exploited?
Can you imagine the anger and outrage that working Americans feel
when their sacrifices bankroll bonuses and higher standards of living
for a few executives.
Corporate executive compensation in the United States is off the
charts, but in the airline industry, the abuse is at its worst. In
2005, American executives paid themselves at a rate more than 400 times
that paid to rank-and-file employees--a disparity in wages not seen
since the 1920s--and, in 2006, the median CEO compensation increased 48
percent to $30.2 million Nowhere is the injustice of the great wage
divide more palpable than in the executive suites of our nation's
airlines.
Since congress passed the Airline Deregulation Act of 1978, one-
hundred-sixty (160) carriers have filed for bankruptcy and aviation
workers have for too long paid the price for mismanagement. The lessons
should have been clear from this tragic track record, yet congress and
our judicial system have ignored the best interests of American workers
and have been complicit in allowing executives the use of our
bankruptcy system to enrich themselves at the cost of their employees.
Recent examples highlight why congress should take immediate action
to address this great injustice.
The moment United Airlines emerged from bankruptcy, company
managers raided its coffers. Far exceeding even the median money grab,
United Airlines CEO Glenn Tilton took $39.7 million in 2006
compensation. This, after cutting its work force by 25 percent, dumping
its workers' under funded pensions and extracting profound sacrifices
from its employees during its three years in bankruptcy.
Incredibly, Mr. Tilton's compensation package was greater than the
entire profit at United Airlines for 2006. This case alone should
compel you to act. Sadly however, there is fresh and ample evidence of
excessive greed in airlines executive suites.
At Northwest Airlines, management recently disclosed a plan to exit
bankruptcy that would reward its top 400 executives with an average of
$1 million each and give nothing back to flight attendants whose wages,
benefits and working conditions have been decimated in bankruptcy. Last
year, after flight attendants at US Airways endured massive pay cuts
over several years, the airline's executives rewarded themselves
multiple million in stock bonuses and double-digit pay increases.
Employees at American Airlines have not been compensated for the $1.6
billion in concessions they gave in 2003 to keep their airline out of
bankruptcy, while AMR CEO Gerard Arpey took more than $7.5 million in a
stock award for 2006.
Congress must take action to rein in management's use of our
bankruptcy system to raid the coffers of American companies, some of
whom were built by generations of hard working employees. Our judicial
system is complicit in this growing greed. Our courts have largely
ignored the pleadings of employees in bankruptcy cases providing no
protection for those most vulnerable when a company reorganizes.
Can any of us remember the last time a bankruptcy court rejected a
compensation package for management?
Irresponsible management of our nation's airlines has been taken to
an extreme. As if in a winner-take-all game of Monopoly, airline
executives seem to be on an unstoppable trajectory, with greed as the
only rule of the game. Your efforts to put an end to excessive
compensation and to rectify bankruptcy laws will serve the greater
interests of all working people who depend on a healthy and just
economy.