Publish Date

Feb 28, 2019

An Introduction to the World of Bankruptcy Compensation

A&M Tax Advisor Weekly

The U.S. economy has picked up momentum in the last decade and has maintained a steady growth rate. As a result, the number of companies filing for bankruptcy has declined. Despite these more favorable economic conditions, some industries such as the retail and energy sectors have seen an increase in bankruptcy filings. Bankruptcy protection remains a critical option for some players in these industries. It is critical that organizations entering a restructuring retain key executive talent in order to maximize the likelihood of a successful emergence from the bankruptcy process.

To assist companies entering bankruptcy with their key executive and employee compensation program designs, Alvarez & Marsal has developed a database containing detailed bankruptcy compensation information from the last 14 years. This article describes the methodology utilized in populating the database, addresses relevant bankruptcy rules and presents our general findings.

Bankruptcy Database Overview

In creating our database, we gathered information on bankruptcy compensation plans (i.e., retention, incentive and severance plans) through a review of court documents from bankruptcies filed between 2005-2018. For purposes of this article, we limited our study to 322 companies that filed for bankruptcy between 2007-2017 with assets valued at $500 million or higher. The charts below summarize the companies included in our study, both by year of filing and industry.

Each of these 322 companies possesses different characteristics in terms of company structure and bankruptcy type, detailed as follows:

  • Filing Type: Approximately 88 percent of the bankruptcies reviewed filed for Chapter 11 (reorganization) bankruptcy protection, 6.5 percent filed for Chapter 7 (liquidation) bankruptcy protection, 4 percent converted from a Chapter 11 to a Chapter 7 proceeding, and 1 percent filed for Chapter 15 (ancillary to international bankruptcy filing) bankruptcy protection.
  • Type of Company: Of the 322 bankruptcy cases reviewed, roughly 71 percent were publicly held upon entering bankruptcy, and the remaining 29 percent were privately held companies. Of the 185 companies that emerged from bankruptcy, roughly 57 percent emerged as private companies, and the remaining 43 percent emerged as publicly held companies.
  • Bankruptcy Period: Of the 262 companies that have completed bankruptcy proceedings, the average time in bankruptcy was 413 days. The shortest amount of time in bankruptcy was approximately two weeks and the longest was approximately 13 years.
  • Outcomes: The chart below summarizes the outcomes of the bankruptcies reviewed.