Hertz Paid Out $16 Million in Bonuses, Days Before Bankruptcy

By Alexander Gladstone 

Hertz Global Holdings Inc. paid more than $16 million in retention bonuses to senior managers, including its new chief executive, just days before it filed for bankruptcy Friday night.

The car-rental company said it agreed to pay a $700,000 bonus to Chief Executive Paul Stone, who was named to the post this month. Chief Financial Officer Jamere Jackson received $600,000 and Chief Marketing Officer Jodi Allen got $189,633, according to a Tuesday regulatory filing.

In all, Hertz said it would pay $16.2 million in cash bonuses to about 340 employees in recognition of uncertainty the company and its employees face as a result of the coronavirus pandemic's impact on travel.

Hertz is the latest troubled company to make payments to top executives before filing for bankruptcy. By paying bonuses before filing, the companies don't need bankruptcy court approval.

In recent weeks a number of companies -- among them J.C. Penney Co. and Whiting Petroleum Corp. -- have paid out bonuses to top brass just before filing for chapter 11. Penney paid $10 million in retention bonuses to top executives before filing. Whiting's top five executives got board approval for $14.5 million in cash payments, including $6.4 million for its chief executive. Another oil company -- Chesapeake Energy Corp. -- that has been teetering on the edge of bankruptcy said it would pay $25 million to a group of senior executives.

Bankruptcy law bars retention payments to senior executives. In the past 15 years, retention bonuses have been largely supplanted in bankruptcy cases by key-employee incentive plans that tie bankruptcy bonuses to earnings targets or to postbankruptcy goals.

Jared Ellias, a law professor at the University of California, Hastings School of Law, said that while the law prevents companies in bankruptcy from paying such bonuses, companies are still able to do so right before they file.

"The window is wide open," Mr. Ellias said. "It's regulatory evasion, you know there's a regulation, so you do it another way."

Proponents of such payments say they are needed to keep the best executives from jumping ship when they are needed most. Detractors say they are simply another way for top-level managers to enrich themselves.

But with many businesses struggling to survive the coronavirus pandemic -- Hertz's revenue in April fell 73% from a year earlier -- incentive bonuses based on financial metrics are essentially out of reach.

Brian Cumberland, an executive-compensation expert with Alvarez & Marsal, said the case for companies to lock down key talent with retention payments is stronger due to the pandemic, which has upended business projections and has made it harder to construct meaningful incentive targets.

"The reason you see the prepay be more compelling now is because of the uncertainty about what would be the metrics that you would put in place, " Mr. Cumberland said. Since 2016, more than 70 companies have prepaid retention bonuses before filing for bankruptcy, according to Alvarez & Marsal.

One potential legal hurdle: Payments made to corporate insiders within one year of a bankruptcy filing can potentially be clawed back into the bankruptcy estate.

Still, while creditors can try to challenge the bonuses in court, it is extremely rare, if not unheard of, for a judge to grant creditors standing to sue on this charge as long as the payment is made before the filing, Mr. Ellias said.

Hertz said plummeting used-car values and a frozen used-car market were key elements in its decision to seek bankruptcy protection. The company entered chapter 11 without a deal with creditors and without a bankruptcy loan to fund its business.

The company, which has laid off about two-thirds of its 21,000 employees, has enough cash to fund operations at least through the initial stage of the bankruptcy case, according to court papers.

--Andrew Scurria contributed to this article.

Write to Alexander Gladstone at [e-mail]

(END) Dow Jones Newswires

May 26, 2020 16:33 ET (20:33 GMT)

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