Executive Compensation For Insolvent Companies
Before purchasing insolvent companies, most buyers do a lot of homework ensuring that they are happy with what they are getting. However, now and then some always gets a nasty surprise when it comes to executive compensation for insolvent companies. |
Before purchasing or acquiring an insolvent company, it is necessary to conduct a thorough due diligence. One should also analyze the financial risks and rewards surrounding the issues related to workers’ compensation, staff relations, superannuation and executive compensation. In addition, you have to be aware how staff have to be treated in the period leading up to the acquisition as this can increase claims.
Chapter 11 of the US Bankruptcy code allows the executives and directors of insolvent companies to remain and continue business operations with the aim of reorganizing and adjusting debts. However, the executive compensation of insolvent companies has caused a lot controversy in the US especially when resources available to pay vendors, creditors and non-executive employees are limited.
Prior to the 2005 US bankruptcy law reform, insolvent companies could request executives to stay during the bankruptcy case. The executives were either provided with cash payments if they stayed for a stated time or severance pay if they were terminated without cause before the agreed time.
These and other executive compensation for insolvent companies came under fierce attack especially when insolvent companies were rejecting union and employee benefits, and retirement plans. This led to leading members of the Congress calling for stricter standards for executive compensation for insolvent companies.
This resulted in the Bankruptcy Reform Act 2005 that set a code for executive compensation and now there are caps on executive compensation for insolvent companies.
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In the eighties and nineties, there was a lot of debate about executive compensation in relation to workers. Critics felt that executives were being paid too much and the amount was not at all in line with what factors affecting the organization.