Bankruptcy salary roll back could become a trend

Is Hostess’ salary roll back good for governance?

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Hostess Brands’ announcement that it would roll back pay increases for top managers in the wake of its recent bankruptcy is welcome news in governance circles for those who would like to see compensation more closely tied to performance.

In this case, however, Hostess didn’t exactly make the move willingly. It took the company going into bankruptcy and a revolt by unions during renegotiations of its pension and benefits to get the company to rescind planned raises, which were as much as 80 percent up on previous salaries.

The Wall Street Journal reported this week that eight of the company’s top executives agreed to change their salaries after Hostess was accused of raising their pay to circumvent bankruptcy rules that prevent companies from paying executives to stay on. The raises were given out just last summer.

Clawback rules that the SEC is still in the process of finalizing may eventually help prevent similar transgressions at marginally performing companies that give outsized raises for undersized performance. Shareholders need such protection to stop executives from raiding a company’s finances even if they don’t drive the company into bankruptcy.

However, in the case of Hostess, perhaps what the company did could begin a trend.

CEO Gregory Rayburn, who took over the company just last month, had his top four executives accept $1 salaries until December 31, or until the company emerges from bankruptcy, whichever comes first; and four other executives had their salaries rolled back to previous levels.

Making executives accountable by reducing or eliminating their salaries until the problem they caused is rectified seems like a healthy disincentive to dissuade them from engaging in activities that threaten the life of the company. While it’s not the first time such a move has been made, Hostess’ recovery from bankruptcy should be watched to see if such measures make the Chapter 11 bankruptcy process move more smoothly.