Executive bonuses might be stirring public outrage these days, but they're still alive and well in corporate America -- and triggering a variety of litigation.
The lawsuits range from corporate officers who allege their companies reneged on bonuses to officers who believe they were fired for protesting them.
Also, attorneys are busy helping corporations revise their bonus plans in the wake of revelations that insurance giant American International Group Inc. handed out $165 million in bonuses after accepting billions of dollars in a massive governmental bailout.
The revelations touched off a public furor -- and planted a legal bull's-eye on corporations.
In Michigan, a banker and former vice president recently sued Citizens Republic Bancorp, claiming he was fired for questioning a $7.5 million bonus for the company's chief executive on the eve of a federal bailout payment. Schwab v. Citizens Republic Bancorp, No. 09-090916-CZ (Genessee Co., Mich., Cir. Ct.).
In California, a former division president of Centex Corp. homebuilders sued his employer for reneging on a promise to pay him $355,000 in bonuses, a suit that he claims led to his firing weeks later. The case recently settled. Pautsch v. Centex Corp., No. 2:2008cv02360 (E.D. Calif.).
In Connecticut, a similar suit settled last week, filed by a former operations manager of a winery who claimed that the winery reneged on agreement to pay her a bonus for increasing its productivity and profitability. The case settled under confidential terms on March 27. Edwards v. Edwards Wines, No. CV-08-5008054-S (New London, Conn., Super. Ct.).
Also in Connecticut, the attorney general is trying to block Journal Register Co., a newspaper publisher, from paying its top executives up to $1.7 million in bonuses amid layoffs and Chapter 11 proceedings. The attorney general, Richard Blumenthal, claims that the bonuses illegally detract from money owed to creditors, such as the state of Connecticut, and "add insult to injury" during tough times.
Attorneys are bracing for more litigation and legislation involving executive bonuses and compensation matters.
"There is a sea change and, at least for the moment, there are no clear rules," said John F. Sandy Smith, a partner at Atlanta's Morris, Manning & Martin. He foresees executive compensation facing "potent challenges" from the political arena, namely, attorneys general. "The [attorneys general] are not only responding to public pressure, but sometimes creating it," he said.
But tough times do not mean companies should abandon executive bonuses altogether, counter management-side lawyers.
"This is a very, very touchy situation," said Gary R. Basham of Basham Parker, an employment defense boutique in Sacramento, Calif., that in recent months has helped several companies revise their bonus plans. "There's been a real upswing in employers wanting to have attorneys review their plans and determine if there is a better way to accomplish the same thing, and protect them from the nightmare that AIG is going through."
Basham knows firsthand the liabilities involved with promising bonuses. He represented Douglas A. Pautsch Jr., the executive who sued Centex over his unpaid bonus. While Basham would not comment on the case due to a confidentiality agreement, he still views bonuses as "a valid tool to reward employees for good performance" and "retain a company's best employees." Companies must be very careful with how they do that, said Basham, who has recently advised companies not to pay bonuses during unprofitable quarters.
It's the retention bonuses that are most likely to cause employers grief, said Frederick Lipman, a partner at Philadelphia's Blank Rome and author of Executive Compensation Best Practices. "A retention bonus in this economy is absurd, unless you find that these people have job offers all over the place," said Lipman, who is a strong proponent of executive bonuses. There's nothing like money to motivate good results, Lipman said. But if the bonus is not justified by the results, he stressed, "they should not be doing it."
BONUSES IN ESCROW
Companies hit by layoffs should especially reconsider bonuses, Lipman said, noting he has a number of clients hit with layoffs that are voluntarily giving up their bonuses to share the sacrifice. More recently, Lipman has recommended that companies put any bonus money into escrow until a risk period has gone by to avoid paying out bonuses prematurely.
A premature bonus is at the heart of the Michigan litigation, in which a banker claims he was fired for objecting to a CEO's compensation demand that he get a $7.5 million retirement bonus up front.
According to the banker's lawyer, Daniel Swanson of Southfield, Mich.'s Sommers Schwartz, his client objected to paying out the retirement bonus because the bank was in financial trouble, and about to receive $300 million in federal bailout money.
"The company lost a record $400 million while he was captain of the ship," Swanson said, referring to the CEO. "The largest bonus in the AIG case was $6.5 million; this was $1 million more?"
Citizens Republic Bancorp spokesman Brian Smith declined comment, saying only that the bank follows all federal executive pay guidelines and has "strong policies and practices to protect" its employees.
If companies do promise employees a bonus, they better make good on it, said employee-rights attorney Mickey Busca of the Busca Law Firm in New London, Conn., who represented the winery manager who sued over her unpaid bonus.
According to Busca, his client had received a bonus every year from the winery since 2001. It stopped in 2007, the year she was terminated, allegedly over personal matters, he said.
"It was largely through her efforts that the winery enjoyed a profitability -- a 17 percent increase in sales in 2007," Busca said. "The bonus was basically earned."
Busca believes his case represents what bonuses are really about: hard work being rewarded. "I don't think the perception of what a bonus is to the average American worker has changed by what has gone on at AIG," Busca said. "I think most people still realize that a bonus is an additional amount of money that an employer gives to the employer for them reaching a goal, or exceeding a goal."
The winery's lawyer, Jerome O'Malley of Tobin, Carberry, O'Malley, Riley & Selinger in New London, declined comment.
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