Executive Salary and Chapter 11

Gretchen Morgenson's column in Sunday's NYT "Gee, Bankruptcy Never Looked So Good" discusses the pay package negotiated for the executives of UAL (the parent of United Airlines) in UAL's Chapter 11 proceedings.  If approved by the bankruptcy judge, the top 400 executives will take 8 percent of the equity of the company when it emerges from the reorganization.  The CEO will receive, in addition to the equity (in options and restricted shares), an annual base salary and bonus of $1.2 million and a lucrative $4.5 benefits package.  The trouble with Ms. Morgenson's outrage is that the salary package is negotiated with a knowledgeable unsecured creditors committee.  The negotiation did not suffer from the collection action problem that plagues a diffuse set of shareholders or from the conflict of interest problems that beset most compensation committees heavily influenced by a sitting CEO.  The unsecured creditors committee was negotiating in its best interest.  The creditors will take equity too and want the company to survive.  The equity dilution then was ceded to the executives by creditors in an arm's length bargain.  The negotiation is an argument that the executives deserve what they get -- that they are worth the salaries. 

Indeed, one can argue that Chapter 11 salaries being similar to non-Chapter 11 salaries is an argument that non-Chapter 11 salaries are legitimate!  This, of course, would make Ms. Morgenson -- a long time critic of executive salaries--cringe.

The answer is in the nature of the market for executives.  Even companies in Chapter 11 must compete for executives in a market otherwise dominated by publicly-held companies who executives are overpaid due to bargaining defects.

John Noceraro argued in Saturday's NYT that the SEC new rules forcing a more accurate disclosure of salaries would not be enough because CEO that make $20 million a year are "beyond embarrassment." He looks for stronger rules capping salaries. We need to give the new SEC rules a chance to work.  It is not the CEO's that disclosure seeks to embarrass -- it is the board of directors that gives CEO's such salaries.