STRUGGLING WITH EXECUTIVE COMPENSATION INCENTIVES IN CHAPTER 11 UNDER THE NEW CODE

As the most far-reaching amendments to the Bankruptcy Code since 1978 came into effect, lawyers speculated anxiously as to how courts would implement new and tougher standards for approval of executive compensation regimes for companies in Chapter 11. After nearly six months of judicial activity under the 2005 Amendments, the question remains largely unresolved. Debtors have generally attempted to skirt the new requirements through creative pleading, including the recharac-terization of retention and severance programs as “incentive ” programs. Courts, often with the consent of creditors ’ committees, have largely been reluctant to be the first to definitively interpret the new statute. As a result of this general resistance, the effects of the new law have yet to be fully determined. This article is designed to be a useful guide for the bankruptcy practitio-ner working in the area of executive compensation. We present the state of the law with respect to executive retention and severance prior to the 2005 Amendments, and then examine the continuing development of the law in this area to date under the Bankruptcy Code’s new provisions. 1