Gee, Bankruptcy Never Looked So Good

By GRETCHEN MORGENSON

IF executive pay is out of control across America - and who would argue that it isn't? - then the compensation being paid to managers running companies in bankruptcy nowadays can only be described as insanity squared.

First came the outrageous sums sought by executives at Delphi, the troubled auto parts marker, even as they asked company workers and other stakeholders to endure huge cuts. Then, last Thursday, unsecured creditors and executives at the UAL Corporation, parent of United Airlines, agreed to a deal in which 400 executives stand to share an astonishing 10 million shares, or 8 percent of the total that the company expects to issue upon its emergence from bankruptcy. As in the Delphi case, this share grab - worth an estimated $115 million - comes after other UAL stakeholders have been asked to make severe sacrifices.

When the UAL deal was announced, it was spun as evidence that the company's managers were exercising restraint. A previous plan, after all, had called for executives to divvy up 10 million shares now and 8.75 million later. Don't ready the poorhouse for these folks, however. Only in corporate America, circa 2006, can executives agreeing to a 47 percent cut in pay still fare so spectacularly.

Bankruptcy experts say that outsized pay at troubled companies is a new and disturbing trend. "Chapter 11 was traditionally about sharing the pain," said Elizabeth Warren, a professor at Harvard Law School who specializes in bankruptcy, "but now it is more a game of feast and famine - starving the shareholders and creditors while the management team grows fat on big salaries."

How fat? Annual salaries for the top eight UAL executives, for example, will total $3.5 million after the company exits bankruptcy, according to court filings. On top of that are target bonuses, at levels equal to 55 percent to 100 percent of salary, depending upon the executive involved.

Glenn F. Tilton, UAL's chief executive, will receive a base salary of $605,625 and a target bonus equal to that amount, the filings state. This is on top of $4.5 million he has received in benefits as part of a pension agreement and a $3 million signing bonus.

Then there are retention payments of $1.39 million earmarked for seven top executives, excluding Mr. Tilton. UAL will pay club dues of $16,520 for two executives as well.

Nice.

But it is the plan's stock compensation component that Brian Foley, an executive pay expert in White Plains, finds so remarkable. Not only is it rich, it is immediate. Mr. Tilton, for example, is in line to receive 822,000 options, valued at around $9 each, and 545,000 restricted shares, estimated to be worth $15 each. Awards to other UAL executives are a similar combination of restricted stock and options.

Tasty.

The heavy emphasis on the restricted shares under the plan increases the pay package's value, Mr. Foley said. Because options will generate gains for the executives only if the underlying stock rises, they are not as valuable as restricted shares, which have a clear value from Day 1. For that reason, Mr. Foley said, compensation experts estimate that each restricted share is equal to three stock options.

Therefore, he said, the UAL package of options and restricted stock is equivalent to a stake of around 14 percent of the company's outstanding shares for executives if options alone were used.

Mr. Foley also noted that the 8 percent stake to be received by UAL executives exceeds what was described as "reasonable" by Towers Perrin, the compensation consultant employed by the company, in court filings last fall. Those filings show Towers Perrin concluding that a reasonable stake of new shares to be received by executives ranged from 3.5 percent to 7.5 percent of stock issued.

"I don't know how they got to a potential spend of 8 percent," Mr. Foley said. "And there is nothing in the documents to preclude them from going to shareholders immediately after emergence and saying now we need a new stock plan" that bestows more options and restricted stock on executives.

According to Jean Medina, a UAL spokeswoman, Towers Perrin noted in another report it filed with the court that "the plan, which has since been reduced, was both reasonable and appropriate for United's situation."

So what's another half a percent among friends?

The vesting period of the pay plan is also remarkably short, Mr. Foley said. According to the court filings, 20 percent of the stock grants will vest after six months, another 20 percent after one year and 20 percent in each of the following three years.

Ms. Medina said in a statement: "We believe, and the official committee of unsecured creditors, which represents our creditors and unions, agreed, that this program was appropriate to enable United to attract and retain top performers. It's in everyone's interests for management to have this component of management compensation tied to the future performance of United's stock price."

Ms. Warren of Harvard said a trend of excessive pay for officials at bankrupt companies is a troubling result of the lack of pushback from other stakeholders. "The lawyers and management team are running the show," she said. "Shareholders are out of the picture and creditors are often unsure about the overall financial stability of the company. That is a perfect set of circumstances for the management to extract much higher compensation than they would get if other people were competing for those management jobs."

Mr. Foley agreed. "The basic concern here is that the players don't seem to discipline themselves as much as they should and the external forces aren't executing any braking power," he said. "And the courts don't seem to hold people as accountable as they should."

Mr. Foley said he was also surprised that Towers Perrin apparently advised both management and the board, and wondered if another consultant would have recommended the same pay package to the board. The court overseeing the UAL bankruptcy is expected to rule on the compensation plan on Tuesday. Got your airsickness bag handy?