Debt restructuring and Executive pay – study of companies successfully emerged from Chapter 11

Chapter 11 is a form of bankruptcy in the US, that allows companies to stay open and operating while reorganising their debt. Many companies that file for Chapter 11 bankruptcy, successfully emerge financially stronger.

So, what happens to executive pay when a company emerges from Chapter 11? There is a perception that companies which have successfully emerged from Chapter 11 increase executive pay and may be at an advantage compared to those which have managed not to go through the process but, which may, therefore, carry a greater debt burden.

MM&K conducted research into several US companies that have filed for and successfully emerged from Chapter 11 between 2011 and 2019. The findings confirmed that, as a general rule, executives’ remuneration does increase significantly in the year of successful emergence from Chapter 11 restructuring. In the case of CEO remuneration, we have seen an average increase of 138% compared to the level of remuneration prior to entering the restructuring and a 64% increase for CFOs. These increases were mainly fuelled by generous bonuses or equity grants.

Is it fair to assume a company emerging from Chapter 11 will continue paying such elevated levels of remuneration to its executives? Some experts do believe so. However, the study suggests that these increases in remuneration reduce significantly in the following year, which might suggest that the significant increases seen in the year immediately after emerging from Chapter 11 may be a one-off reward for a successful restructuring. All in all, the level of executive remuneration, after the initial increase post-Chapter 11, does appear to depend mainly on the companies’ performance and success (or lack of it).

For further information on the topic please contact Margarita Skripina.

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