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Bankrupt RadioShack Wants to Reward Execs With Bonus Pay

By Alyce Lomax - Feb 16, 2015 at 8:02AM

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Some people benefit big-time from bankruptcy, and chances are, it isn't you.

For most Americans, the "failure" concept is scary precisely because it means taking a financial hit. For a few others, though, there tends to be a little more victory -- or at least a lot less agony -- in defeat. Even in the midst of what most of us would call epic failure, the top tiers of corporate managements often get paid handsomely despite failure.

Take RadioShack's (RSHCQ) bankruptcy for example. Despite being broke, the retailer is now angling to pay out several million to a handful of employees.

Just a little set aside
RadioShack, which finally filed for Chapter 11 bankruptcy protection recently, has asked the bankruptcy court to allow it to allot $3 million for retention bonuses to give eight executives and 30 other employees financial incentive to stay on board.

It's still unclear who exactly would qualify for the bonuses, which would range from $88,000-$650,000 for eight executives, with the additional $1 million set aside for 30 others who also landed in the "critical employee" bucket.

Meanwhile, though, many of the 27,500 RadioShack employees out there are likely worried about their jobs or have already been laid off. When it comes to regular old severance, RadioShack had already changed its policy in December so that former employees would no longer receive lump sums, but instead get payments in weekly or bi-weekly dribs and drabs until the full amount is reached.

Given the bankruptcy, that also means they're just part of the huge crowd of entities to which RadioShack owes money -- money they may or may not receive..

Looking up the (pay) record
RadioShack had already been using its scarce financial reserves to try to convince upper tier execs to stay long before this most recent setback.

Last year, the company agreed to pay Chief Executive Officer Joe Magnacca a $500,000 bonus to hang in there through next year; its rationale was "due consideration of the skills and talent deemed critical to the company's business turnaround efforts currently under way, the difficult business environment, and the competition for skilled, talented employees." Other executives were eligible for bonuses of $187,500 and $275,000 at the time.

Clearly, the incentives didn't do much to help the struggling chain, which hasn't reported a profit since the year ended December 2011. Things were bad enough without its own strategic missteps; the electronics landscape is super competitive, and it had to contend with a multitude of big-box stores like Best Buy (BBY 2.83%), not to mention online powerhouse Amazon.com (AMZN -0.99%).

However, it's pretty easy to say management's strategy was lacking, too. Take last year's bizarre decision to spend big bucks on a Super Bowl commercial. The retailer went on to report continued poor financial results and 1,100 store closures shortly thereafter.

It hasn't been lost on RadioShack's shareholders that some people have been making gains despite the retailer's struggle to survive -- and it wasn't them.

Last August, the majority of RadioShack shareholders used their say-on-pay votes to express displeasure with overall CEO pay policies for the second year in a row. Only 43% voted in favor of the pay plan. In 2013, CEO Magnacca had received a base salary of $893,000, and a $1.3 million bonus, $1 million of which was a sign-on bonus.

The bankruptcy benefits club
Word of RadioShack's request gave me a case of déjà vu. In 2011, Borders sought to pay out $8.3 million in bonuses as it plodded through bankruptcy and shut down stores in its efforts to put its financial house back in order. (As we all know, though, Borders ultimately couldn't be saved.)

Digging deeper in my archive for related topics, I remembered that in 2012, The Wall Street Journal published an article called The CEO Bankruptcy Bonus, which revealed some disturbing data along these lines.

It teamed up with consulting firm Valeo Partners and studied CEO pay at 21 of the largest 100 companies that had gone through bankruptcy. Those CEOs together raked in $350 million when one takes into account base salary, bonuses, stock, and severance, and some enjoyed larger windfalls during bankruptcy protection than they had beforehand.

The median pay for the studied set of folks was $8.7 million, only a tad lower than the $9.1 million median pay for regular S&P 500 companies at the time. RadioShack's case is grating, but it's not without precedent.

Death of the meritocracy
The court will decide whether RadioShack can go forward with the bonuses at a hearing scheduled for March 4.

Regardless of RadioShack's specific outcome, this situation highlights some questions about our own society's view on merit, money, and the marketplace.

Why do so many default to a hard-edged "tough luck" attitude toward most Americans when things like mass layoffs go down, yet shrug or sometimes even defend CEOs and other high-ranking executives who make out like bandits even though their performance has been poor or even downright damaging?

Things like bonuses for bankruptcy and a more common insult to common sense, golden parachutes, represent perverse incentives.

It's time to rethink who we see fit to reward, and why. The last thing a healthy marketplace needs is incentive to fail.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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