[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
EXECUTIVE COMPENSATION IN CHAPTER 11 BANKRUPTCY CASES: HOW MUCH IS TOO 
                                 MUCH?

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 17, 2007

                               __________

                           Serial No. 110-11

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov





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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. SCOTT, Virginia            HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts      CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts   RIC KELLER, Florida
ROBERT WEXLER, Florida               DARRELL ISSA, California
LINDA T. SANCHEZ, California         MIKE PENCE, Indiana
STEVE COHEN, Tennessee               J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia                STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                LINDA T. SANCHEZ, California, Chairwoman

JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
STEVE COHEN, Tennessee

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel








                            C O N T E N T S

                              ----------                              

                             APRIL 17, 2007

                           OPENING STATEMENT

                                                                   Page
The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................     1
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Ranking Member, Subcommittee on Commercial 
  and Administrative Law.........................................     2
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, Chairman, Committee on the 
  Judiciary, and Member, Subcommittee on Commercial and 
  Administrative Law.............................................     4

                               WITNESSES

Mr. Damon A. Silvers, Associate General Counsel, American 
  Federation of Labor and Congress of Industrial Organizations, 
  Washington, DC
  Oral Testimony.................................................     8
  Prepared Statement.............................................    10
Ms. Antoinette Muoneke, Association of Flight Attendants--CWA, 
  Federal Way, WA
  Oral Testimony.................................................    14
  Prepared Statement.............................................    15
Mark S. Wintner, Esquire, Stroock & Stroock & Lavan LLP, New 
  York, NY
  Oral Testimony.................................................    17
  Prepared Statement.............................................    19
Richard Levin, Esquire National Bankruptcy Conference, New York, 
  NY
  Oral Testimony.................................................    21
  Prepared Statement.............................................    23

                                APPENDIX
           Material Submitted for the Printed Hearing Record

Prepared Statement of the Honorable Stephen I. Cohen, a 
  Representative in Congress from the State of Tennessee.........    43
Material for the printed hearing record submitted by the 
  Association of Professional Flight Attendants (APFA), to the 
  Honorable Linda Sanchez:
    News Release concerning American Airlines Flight Attendants' 
      Nationwide Protest.........................................    44
    Submission entitled ``2003 Sacrifices from AA Flight 
      Attendants Restructuring Agreement''.......................    45
    Submission entitled ``American Airlines Flight Attendant 
      Facts''....................................................    47
    Submission entitled ``APFA FACTS On American Airlines 
      Executive Bonus vs Employee Concessions''..................    48
Prepared Statement of Patricia A. Friend, International 
  President, Association of Flight Attendants--CWA, AFL-CIO......    49

                        OFFICIAL HEARING RECORD
                  Material Submitted but not Reprinted

Cover letter regarding Proxy Statement filed by UAL Corp., from 
  Mark Anderson, Vice President of Government Affairs, UAL Corp., 
  to the Honorable John Conyers, Jr., Chairman, Committee on the 
  Judiciary, submitted by the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and Ranking 
  Member, Subcommittee on Commercial and Administrative Law
Form DEF 14A UAL Proxy Statement submitted by the Honorable Chris 
  Cannon, a Representative in Congress from the State of Utah, 
  and Ranking Member, Subcommittee on Commercial and 
  Administrative Law


EXECUTIVE COMPENSATION IN CHAPTER 11 BANKRUPTCY CASES: HOW MUCH IS TOO 
                                 MUCH?

                              ----------                              


                        TUESDAY, APRIL 17, 2007

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:34 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable Linda 
Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Conyers, Johnson, 
Delahunt, Cohen, Cannon, Jordan, Feeney, and Franks.
    Ms. Sanchez. This hearing of the Committee on the Judiciary 
Subcommittee on Commercial and Administrative Law will come to 
order.
    Before we begin today's hearing, out of respect for the 
victims and families of yesterday's tragedy at Virginia Tech, I 
would like to begin this hearing by observing a brief moment of 
silence for those victims and their families.
    Thank you.
    I will now recognize myself for a short statement.
    As a result of many Chapter 11 bankruptcy proceedings, 
``the rich are getting richer while the poor are getting 
poorer,'' as stated in a recent press release by the Northwest 
Flight Attendants Union.
    This is a compelling summary of a recent phenomenon that 
should concern all of us. Chapter 11 of the Bankruptcy Code was 
originally enacted to give all participants an equal say in how 
a business, struggling to overcome financial difficulties, 
should reorganize. Unfortunately, this laudable goal does not 
reflect reality, especially for certain participants in Chapter 
11.
    This problem is clearly illustrated by the numerous Chapter 
11 cases in which chief executive officers receive outrageously 
large compensation and bonus packages while they simultaneously 
slash the wages, benefits and even jobs of the workers who are 
the backbone of those businesses.
    ``All too often,'' as one bankruptcy judge recently 
observed, executive retention plans ``have been widely used to 
lavishly reward, at the expense of the creditor body, the very 
executives whose bad decisions or lack of foresight were 
responsible for the debtor's financial plight.''
    This is an issue that deserves more attention from this 
Committee.
    While I commend my colleagues on both sides of the aisle, 
Ranking Member Chris Cannon and Representative Bill Delahunt, 
for their efforts to address certain aspects of this problem, 
much more, unfortunately, still needs to be done.
    Here is just one example. The chief executive officer of 
UAL Corporation, the parent of United Airlines, received 
compensation worth $39.7 million in 2006, just after UAL 
emerged from 3 years of Chapter 11 bankruptcy protection. 
During the course of its bankruptcy, however, UAL terminated 
pensions for 120,000 workers and shifted $5 billion in pension 
obligations to the PBGC, resulting in the largest pension 
default in the history of the United States, according to the 
Associated Press.
    These inequalities are astounding. The Executive 
Compensation Committee of the American College of Bankruptcies 
recently issued a report noting that employee retention and 
incentive compensation programs present a ``daunting 
challenge.'' It continued, there are few issues faced by 
Chapter 11 debtors that are more difficult and potentially 
contentious than management compensation issues.
    Accordingly, I look forward to hearing the testimony of the 
witnesses at today's hearing. To help us further explore these 
issues, we have a truly notable witness panel.
    We are pleased to have Damon Silvers, Associate General 
Counsel for the AFL-CIO; Antoinette Muoneke, a United Airlines 
flight attendant and representative of the Flight Attendants 
Association; Mark Wintner, expert on employee benefits and 
executive compensation; and Richard Levin, vice chair of the 
National Bankruptcy Conference.
    Rest assured that it is my intention to consider in future 
hearings other aspects of the imbalance that exists in Chapter 
11 concerning management and labor, particularly with respect 
to collective bargaining agreements and retirement benefit. 
Additionally, there are other issues in bankruptcy that should 
be addressed by this Committee, including the compensation of 
trustees in Chapter 7 cases.
    It has been many years since Congress has examined these 
issues. I know Committee Chairman John Conyers shares my 
concern about the urgent need to refocus and conduct a long 
overdue analysis of Chapter 11 and how it impacts workers.
    I would now like to recognize my colleague, Mr. Cannon, the 
distinguished Ranking Member of the Subcommittee, for any 
opening remarks he may have.
    Mr. Cannon. Thank you, Madam Chair.
    Today we are considering an issue of common interest 
regarding how to best compensation executives who must rescue 
and rehabilitate enterprises contributing products, services 
and jobs to our society under Chapter 11 of the Bankruptcy Act.
    Chapter 11 seeks to reconcile many independent interests, 
just like other chapters of the Bankruptcy Code, but the 
paramount aim of Chapter 11 is to save companies that can still 
be saved.
    To reach that aim, we have to strike the right balance 
between conserving founder companies' resources and spending 
enough of those resources to keep on track the management teams 
that can turn those companies around and return them to 
prosperity. If we don't get that right, the entire Chapter 11 
system is undermined.
    In the Bankruptcy Abuse and Consumer Protection Act, we 
enacted a number of limitations on executive compensation in 
Chapter 11 settings. Several of these limitations, codified in 
section 503C1 of the act, are known as Key Employee Retention 
Plan or KERP's provisions.
    Under the KERP's provisions, subject to court approval, 
special retention packages designed to induce key executive 
personnel to stay on at a Chapter 11 company can now be made 
only when they are, first, essential to the retention of an 
individual because the individual has a bona fide job offer 
from another business at an equal or greater salary; two, 
essential to the survival of the business; and, three, do not 
exceed certain levels indexed to prior year non-management pay 
executive retention bonuses.
    Prior to enactment, concerns were noted about these 
provisions; the proponents offered that they were necessary to 
prevent Enron-type abuses. Others, however, including me, 
believe that they are unduly restrictive. I believe that such 
tight restrictions on management compensation are merited only 
where there is evidence of insider negligence, mismanagement or 
fraudulent conduct that contributed in whole or in part to the 
company's insolvency.
    Otherwise, I believe we would run the risk of hampering 
companies' best chance to survive and prosper by failing to 
retain talented and responsible management already intimately 
familiar with the company. Some say that if we focus too much 
on such considerations, we run the risk of paying management 
too much to stay while potentially cutting labor pay and 
benefits.
    In the last Congress, such arguments led to the 
introduction of legislation that would have extended the 
already too restrictive KERP's provisions to performance and 
incentive pay bonuses and other forms of executive compensation 
essential to competing in the market for executive personnel.
    That argument is false. It is critical that a Chapter 11 
debtor be able to retain management that is dedicated to 
maintaining the company's value, not out of self-interest of 
executives but for the benefit of all of its creditors, 
investors, employees and stakeholders. All too often, companies 
that fail to reorganize successfully are converted to Chapter 7 
for liquidation, where not only do the creditors receive 
pennies on the dollar, but employees face a much bleaker 
prospect of losing their jobs.
    Courts have now had experience implementing the KERP's 
provisions and companies have attempted to survive under them. 
This hearing presents a good opportunity to see whether the 
provisions are working or are counterproductive.
    What the record shows is that in practice the KERP's 
provisions have generated some controversy. In the Dana Corp. 
case, for example, the bankruptcy court in Manhattan denied an 
initial executive compensation plan.
    That plan consisted of the following: a base salary for the 
CEO of $1.552 million and of $500,000 to $600,000 for other 
executives; an annual incentive program or AIP that could have 
paid the executives anywhere from $336,000 to $528,000 and the 
CEO up to $2 million; a completion bonus that would provide a 
minimum of $400,000 to $560,000 for executives and $3.1 million 
for the CEO upon the effective date of the plan of the 
reorganization as well as uncapped bonus based on the total 
enterprise value of the debtors 6 months after the effective 
date of the reorganization plan; and finally, four, a severance 
non-compete package worth more than $167,000 per month for up 
to 18 months if the CEO was terminated for anything other than 
cause.
    Without knowing more, one can imagine that such a plan 
might be unduly generous. The court found it so, focusing 
largely on the conclusion that the plan's guaranteed payments 
to executives could only be treated as retention payments 
subject to section 503C1 rather than incentive payments subject 
to a business judgment rule under the sub-provisions of section 
503C3.
    In November 2006, the court approved a modified and more 
modest plan. The approved plan was found to be an incentive 
plan escaping the KERP's provisions, but only because the court 
reviewed the plan holistically and did not draw on the features 
of the plan that were similar to those previously rejected for 
violating the KERP's provisions. The court emphasized that 
merely because a compensation plan has some retentive effect 
does not mean that the plan overall is retentive rather than 
incentivizing in nature.
    Under this approach, if a plan is on the whole 
incentivizing in nature, it may not be subject to otherwise 
applicable KERP's provisions. Some believe that this approach 
opens up a loophole in the Bankruptcy Code and that we should 
close that loophole. Others may believe that it shows all the 
more that restrictions like KERP's provisions need to be 
imposed on incentive pay and other forms of executive 
compensation.
    I believe that the Dana Corp. case shows in one important, 
real-life example how the KERP's provisions have underserved 
the needs ot Chapter 11 companies for flexibility in 
structuring executive compensation packages that can keep the 
right management teams in place. I believe that it shows that 
experienced bankruptcy courts see the same thing and are 
straining to interpret the code in a way that would help keep 
Chapter 11 companies from becoming Chapter 7 economic 
shipwrecks.
    I look forward today to hearing from all of the witnesses 
on these and other cases as we hear their views on how the 
KERP's provisions are working or not working in practice and I 
hope this hearing helps us better understand the importance of 
not undercutting the needs of Chapter 11 companies for 
essential leadership.
    Thank you, Madam Chair. I yield back.
    Ms. Sanchez. I thank the gentleman for his statement.
    I would now like to recognize Mr. Conyers, a distinguished 
Member of the Subcommittee and the Chairman of the Committee on 
the Judiciary.
    Mr. Conyers?
    Mr. Conyers. Thank you so much, Madam Chairperson.
    Let me tell you how pleased I am that you and Chris Cannon, 
your Ranking Member, Bill Delahunt from Massachusetts, are all 
looking at something that hasn't been examined for some 20 or 
more years.
    What we are talking about is the inequality in incomes in 
this great country of ours. I want to be the first to say it 
here: the rich are getting richer, the poor are getting poorer. 
One percent of the top 300,000 people make nearly, or aggregate 
nearly as much as the 150 million others in the tax scheme in 
the United States of America.
    So we are looking at this section 11 for the first time and 
I want to congratulate you.
    I would like unanimous consent to have entered in at the 
end of my comments the ``Nation'' article of April 23, 2007, 
entitled, ``A Time to Act on Inequality.''
    Ms. Sanchez. Without objection, so ordered.
    [The submission from Mr. Conyers follows:]
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Conyers. Now, too often we have got executives 
receiving extravagant multi-million-dollar bonus packages, 
stock options, and golden parachutes, while the workers at the 
same time are being drastically reduced in their pay, their 
pensions, their health care. And sometimes, of course, they 
lose everything.
    We are just finally getting around to it and I am so proud 
of this Subcommittee on Commercial and Administrative Law, that 
we are examining this question. It is way, way overdue.
    Now, you talked about Glenn Tilton at United Airlines, but 
I have got a friend of mine in Detroit at Ford Motor Company, 
Alan Mullaley, who was paid--he just started--$28 million in 
the first 4 months of his job, from a company that has reported 
a $12.7 billion loss for last year and is reducing and 
relocating factories all across the country.
    Ford, General Motors, Daimler-Chrysler prepare to start 
negotiations with the unions to obtain concessions and labor 
savings with the current contracts, how do they do that? Well, 
I will tell you. It is because section 1113 of the Bankruptcy 
Code allows the debtors to avoid contractual obligations under 
collective bargaining agreements with their workers.
    People keep asking why is the UAW conceding so much to the 
corporations. Well, it is because the corporations tell them we 
are going into bankruptcy, we are going into court, and we have 
got the authority to eliminate contractual obligations.
    How many lawyers would enter into an agreement and then one 
of them calls back the other in a year and says, well, things 
have gone sour, we have got to renegotiate, my friend. They 
would be asked if they lost their minds. But this is in 
bankruptcy law at this point.
    And so it is time we try to deal with this. The gentleman 
from Massachusetts, Senator Kennedy, tried vainly to improve on 
it. I introduced legislation with Evan Bayh of Indiana just in 
the last Congress to try to at least make the executives report 
the amounts of money that they are receiving. This goes in 
under the radar screen.
    And so this hearing couldn't have come at a more 
appropriate time. I commend the Members of the Subcommittee, 
but especially the Chairwoman.
    Ms. Sanchez. Thank you for your statement, Mr. Conyers.
    Without objection, other Members' opening statements will 
be included in the record.
    And without objection, the Chair will be authorized to 
declare a recess of the hearing.
    I am now pleased to introduce the panel of witnesses for 
today's hearing. Our first witness is Damon Silvers, associate 
general counsel for the AFL-CIO. Prior to his current role, Mr. 
Silvers was a law clerk for the Delaware Court of Chancellery 
for Chancellor William T. Allen and Vice Chancellor Bernard 
Balick. Mr. Silvers is also a member of the American Bar 
Association Subcommittee on International Corporate Governance.
    Welcome.
    Our second witness is Antoinette Muoneke. Ms. Muoneke has 
been a flight attendant for United Airlines since 1979. She 
resides in Federal Way, Washington.
    Thank you for being here.
    Our third witness is Mark Wintner, a partner at the law 
firm, Stroock and an expert on employee benefits law and 
executive compensation. Mr. Wintner chairs the American Bar 
Association Business Law Employee Benefit Subcommittee on 
Planned Termination, Merger and Bankruptcy. Mr. Wintner also 
serves as a member of the ABA's Joint Council on Employee 
Benefits.
    Thank you for being here.
    And our final witness is Richard Levin, vice chair of the 
National Bankruptcy Conference. Mr. Levin is a partner at 
Skadden Arps, concentrating on corporate restructuring and 
solvency and bankruptcy issues. Mr. Levin was counsel to a 
House Judiciary Committee Subcommittee and was one of the 
principal authors of the Bankruptcy Code and the Bankruptcy 
Reform Act of 1978.
    We appreciate you being here this morning as well.
    Without objection, your written statements in their 
entirety will be placed into the record and so we would ask 
that you limit your oral testimony to 5 minutes.
    You will note that we have a lighting system that starts 
with a green light. At 4 minutes, it turns yellow. That is your 
warning that you have a minute to try to summarize your 
testimony. At 5 minutes, the light will turn red, notifying you 
that you are in fact out of time.
    We will let you go a little bit over to let you complete 
your thoughts, but please try to be mindful of the time and the 
lights.
    After each witness has presented his or her testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the 5-minute limit.
    Mr. Silvers, will you please proceed with your testimony?

   TESTIMONY OF DAMON A. SILVERS, ASSOCIATE GENERAL COUNSEL, 
    AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL 
                 ORGANIZATIONS, WASHINGTON, DC

    Mr. Silvers. Thank you, Madam Chairperson. My name is Damon 
Silvers. I am an associate general counsel of the American 
Federation of Labor and Congress of Industrial Organizations. I 
will try to be brief so that my client to my left can speak, 
who I think really has point of precedence here.
    In 2002, the AFL-CIO helped over 5,000 laid off Enron 
workers, non-union workers, recover up to $13,500 in severance 
money that had been taken away from them in the bankruptcy 
process. During that time, the chief executive officer of 
Enron--this is after the departure of Ken Lay--during that time 
the chief executive officer was Steve Cooper, a principal in 
the turnaround group of Zolfo-Cooper.
    Enron, of course, liquidated. It was one of those bad 
situations that Congressman Cannon was referring to. But when 
the case completed, Steve Cooper's firm received about $120 
million in compensation for the work he did.
    Mr. Cooper then went out and bought for himself a $20 
million penthouse apartment on Fifth Avenue, perhaps the most 
expensive piece of apartment real estate purchased in New York 
to date.
    Contrast Steve Cooper's fate with that of my friend Louis 
Allen, who was a mid-level executive at Enron. He was in charge 
of transportation at Enron. Mr. Allen was a single father, the 
first person in his family to go to college and to work in 
management. Mr. Allen lost his job, his 401(k), his health 
insurance and his home and, with his 11-year-old daughter, had 
to return to living with his mother, who worked as a grocery 
clerk in Houston.
    Louis Allen, in the end, got only a small fraction of the 
severance he was promised by Enron, and in the fall of 2002, 
still without a job and living with his mother and 11-year-old 
daughter, Mr. Allen had a stroke and died at the age of 44. 
Neither he nor his mother nor his daughter has, to date, 
received any meaningful recovery from his lost pension.
    The AFL-CIO is extremely proud of the role that the working 
people of this country played in standing up for the Enron 
workers, but we do not believe that the outcome I just 
described, on the one hand for Mr. Cooper and on the other hand 
for Mr. Allen, could be described by any sane person as just. 
And in this respect, Enron was not the exception but the rule.
    Let me give you a couple of examples from some more recent 
well-known bankruptcies. United Airlines: all United employees, 
including Ms. Muoneke to my left, lost their real pension plans 
and all the retirees had substantial cuts in their retiree 
health benefits. United flight attendants, who before the 
bankruptcy had incomes typically in the 30's--$30,000, not $30 
million--took pay cuts of 17 percent.
    I don't think most of us can possibly comprehend what it 
means to be living on a $30,000 a year income and take a 17 
percent pay cut.
    As you mentioned, Madam Chairwoman, the CEO got $39 million 
in stock and an $840,000 cash bonus.
    Delphi Corporation: tens of thousands of jobs gone. Motions 
in front of the bankruptcy court to cut middle class wages to 
$12.50 an hour, and in parallel, motions in front of that court 
for close to $500 million in total executive comp, $40 million 
of which have been granted.
    Dana Corp.: Congressman Cannon, I think, described in great 
detail what the executive comp package that was eventually 
approved was. For those of us who may be slow on the math, that 
is about $7 million a year in potential comp that was awarded 
by the court, following the Congress's attempt to rein these 
matters in, while simultaneously that same company is seeking 
to cut pay, to end programs, to end benefits for workers such 
as life insurance, long-and short-term disability, even tuition 
reimbursement. And to completely eliminate Dana's obligation to 
pay retiree health care benefits.
    Like so much of our system of business regulation and 
corporate governance, our business bankruptcy system has become 
a vehicle for the transfer of evermore staggering amounts of 
wealth from a variety of parties, but in particular from long-
term employees, into the hands of a very, very small number of 
executives and turnaround specialists.
    As was discussed earlier, Madam Chairwoman, Congress has 
tried to rein in this intolerable trend by placing strict 
limitations on so-called retention bonuses in bankruptcy. 
Unfortunately and predictably, the corporate response has been 
to relabel the same amount of money and keep paying it, and the 
courts appear to be going along with that maneuver.
    The bankruptcy system has become a mere mirror of the 
excesses found in the larger corporate culture, but there are 
structural reasons why those excesses are particularly harmful 
in bankruptcy. Those structural reasons--and I will try to wind 
up here--those structural reasons, the central aspect of them 
is the fact that bankruptcy is an environment in which all 
contracts are potentially breachable. And so the typical 
rationale for focusing executive behavior on one particular 
constituency, the equity of the company, does not apply in 
bankruptcy.
    And the further harmful aspect of this is the incentive 
effect on executives who are contemplating from the perspective 
of a company not yet bankrupt, who are contemplating going into 
bankruptcy and declaring a war of choice against their 
employees and their communities.
    In response, the AFL-CIO believes the Congress should take 
two steps to address these problems with executive pay. First, 
the sorts of procedural protections that Congress recently put 
in place with respect to KERP's should be brought in to cover 
executive pay in its totality so that the sort of game-playing 
that Congressman Cannon alluded to cannot take place.
    Secondly, Congress should mandate that pre-petition 
executives, executives who have not filed yet, who are seeking 
to breach contractual commitments to their employees should 
have to personally share the pain in an amount proportional to 
what they are asking their colleagues to bear. Such a measure 
would focus the minds of executives contemplating bankruptcies, 
as I have said, as a war of choice, before they made any 
decisions that the rest of us might come to regret.
    The AFL-CIO looks forward to further hearings and I thank 
you for your time.
    [The prepared statement of Mr. Silvers follows:]
                 Prepared Statement of Damon A. Silvers
    Good morning, Chairwoman Sanchez, my name is Damon Silvers and I am 
an Associate General Counsel of the American Federation of Labor and 
Congress of Industrial Organizations. First, let me express the labor 
movement's gratitude to you and the Committee for holding this hearing 
on the enormously important question of whether executive compensation 
in our business bankruptcy system is fulfilling the overall purposes of 
the bankruptcy code.
    In 2002, the AFL-CIO assisted over 5,000 laid off non-union Enron 
workers in their efforts to obtain the severance payments they needed 
to live on while they found new work. After months of litigation in the 
bankruptcy courts, we obtained a settlement which paid the workers up 
to $13,500 in lost severance pay. During that time the Chief Executive 
Officer of Enron was Steve Cooper, a principal in the turnaround firm 
of Zolfo Cooper. Enron of course liquidated, and when the case 
completed, Steve Cooper's firm asked from the court a $25 million 
``success fee,'' even though the Justice Department's U.S. Trustee 
Program uncovered unacceptable billing practices (Cooper eventually 
agreed to cut this fee in half). This was after Cooper and his firm 
were already paid $107 million for their work.\1\ Cooper recently 
bought a $20 million penthouse on 5th Avenue, one of the most expensive 
apartments sold in Manhattan during the real estate boom.
---------------------------------------------------------------------------
    \1\ The Houston Chronicle, 3/28/2006.
---------------------------------------------------------------------------
    Contrast Steve Cooper's fate with that of Louis Allen, a mid-level 
executive at Enron. Lewis was a single father, the first person in his 
family to go to college and work in management. He lost his job, his 
401k, his health insurance and his home, and with his daughter had to 
return to living with his mother, who worked as a grocery clerk in 
Houston. Lewis Allen in the end only got a fraction of the severance he 
was promised. In the fall of 2002, still without a job and living with 
his mother, Lewis had a stroke and died at the age of 44. Neither he 
nor his mother nor his daughter has to date received any meaningful 
recovery from his lost pension.
    The AFL-CIO is extremely proud of the role the working people of 
this country played in standing up for the Enron workers. But we do not 
believe the outcomes I just described could be described by any sane 
person as just. And the outcome at Enron has much in common with the 
grotesque inequities workers experience throughout the business 
bankruptcy system today.
    Let me give you a couple of examples from some well-known recent 
bankruptcies.
    Polaroid--Upon filing for Chapter 11 in 2001, Polaroid reneged on 
its severance policies, and cut off all company payments for employees' 
health, dental and life insurance plans. Six months later, a bankruptcy 
judge approved Polaroid's plan to pay $4.5 million in retention bonuses 
to forty executives. The plan approved by the court provided for the 
most senior executives in the pool to receive bonuses of as much as 
62.5% of their base pay as well as severance payments also equal to 
62.5% of their base pay. Other executives would be eligible to receive 
bonuses and severance payments equaling 25 to 50% of their base 
salaries.\2\
---------------------------------------------------------------------------
    \2\ Jessi D. Herman, Pay to Stay, Pay to Perform or Pay to Go?: 
Construing the Threshold Terms of 503 (C)(1) and (2), Emory Bankruptcy 
Developments Journal, Fall 2006, 319
---------------------------------------------------------------------------
    United Airlines--United went into bankruptcy as a strategy to 
extract significant labor cost cuts. All United employees lost their 
defined benefit pension plans and retirees ended up with substantial 
cuts in their retiree health benefits. United employees took 15% to 40% 
pay cuts, including a 17% cut for flight attendants and 40% cut for 
pilots. In total, over 50,000 United employees gave up several billions 
of dollars. At the end of the case, United proposed emergence stock 
grants for management worth $150 million in its reorganization plan--
about 9% of the new stock of the company. Last year pay and stock worth 
$39 million was awarded to United CEO Glenn Tilton, including an 
$840,000 bonus (over 120% of his base salary).
    Delphi Corporation--Delphi, a large automotive supply company went 
into bankruptcy in 2005. Delphi immediately proposed to eliminating 
thousands of U.S-based jobs and cutting the middle class wages earned 
by people making sophisticated auto parts down to as little as $12.50 
an hour. At the same time--mere weeks into its bankruptcy case--Delphi 
unveiled a Key Employee Compensation Program of six-month ``bonus 
opportunities'' and an emergence bonus plan consisting of $88 million 
for some 486 managers--some payments as much as 280% of salary. In 
addition, Delphi proposed to grant 10% of the reorganized Delphi's 
equity to 600 executives, a program valued at $400 million, including 
$12.5 million in restricted stock for its top five executives. Just 
prior to bankruptcy, Delphi enhanced its severance program for 21 
executives--severance that would pay out between $30 million and $145 
million. So far, Delphi has gotten approval of bonus plans worth about 
$40 million a year but the severance payments were not even subject to 
court oversight, nor was a signing bonus paid to Delphi's new CEO in 
lieu of salary, since they were in place before Delphi filed its case 
mere days before the new Bankruptcy Code amendments took effect.
    Dana Corporation--Dana is another automotive parts supplier that 
filed a bankruptcy case in New York last year. Dana's restructuring 
plan is to send as many good-paying U.S. manufacturing and assembly 
jobs as it can to Mexico and other low cost economies. For the jobs 
that are left, Dana asked the bankruptcy court to cut pay, and cut or 
eliminate a wide range of benefits such as life insurance, long and 
short term disability--even tuition reimbursement programs, and 
completely eliminate Dana's obligation to pay retiree health benefits. 
Before they got to bankruptcy court on the workers' pay and benefits, 
though, Dana's senior executives renegotiated their employments 
contracts. Those contracts, which included significant stock-based 
compensation pre-bankruptcy, were not worth what the executives thought 
they'd be worth as a result of Dana's bankruptcy. Under their 
renegotiated contracts, Dana's CEO, between a base salary of $1 million 
per year plus bonuses, can earn $6.5 million a year while the company 
is in bankruptcy. The other five senior executives can earn combined 
annual compensation of $ 7 million while their company is in 
bankruptcy.
    US Airways--US Airways went through two bankruptcy cases in which 
the pilots' pay alone was cut up to 50%. In addition, by the time the 
two cases were over, all the employees lost their pension plans and 
retiree health was all but eliminated. US Airways' management got a 
bonus and severance program worth some $20-30 million.
    Workers in chapter 11 cases across a wide range of industries 
(manufacturing, airline, trucking, retail and other service 
industries), are paying an enormous price under threats that their 
labor agreements will be rejected, their jobs will be outsourced and 
retirement security threatened. Meanwhile, company executives and 
management move quickly to secure their own agreements and replace 
compensation such as supplemental executive retirements plans and 
stock-based compensation rendered worthless by the bankruptcy payment 
priorities with new, lucrative programs that insulate them from the 
economic dislocation of the bankruptcy.
    Like so much of our system of business regulation and corporate 
governance, our business bankruptcy system has become a vehicle for the 
transfer of ever more staggering amounts of wealth from a variety of 
parties, but in particular long term employees, into the hands of a 
very, very small number of executives and turnaround specialists. 
Recently, Congress tried to rein in this intolerable trend by placing 
strict limitations on so-called retention bonuses in bankruptcy.\3\ In 
response, the management community and their compensation consultants, 
with the full cooperation of the bankruptcy bench, appear to have 
continued the same type of post-petition payments to pre-bankruptcy 
management under new labels--most prominently now as ``incentive pay,'' 
where highly speculative incentive targets are designed to guarantee 
some payment, even for delivering a business plan or reorganization 
plan, something reorganization fiduciaries are required to do 
anyway.\4\
---------------------------------------------------------------------------
    \3\ The Bankruptcy Abuse Prevention and Consumer Protection Act of 
2005 (BAPCPA), 11 U.S.C. Sec. 503(c)(1), provides that the debtor shall 
not make payments to insiders such as executives for the purpose of 
inducting such person to remain with the debtor's business without an 
express finding by the court that 1. The payment or obligation is 
essential to keep the person from accepting a bona fide job offer for 
the same or greater pay; 2. The person's continued retention is 
essential to the survival of the business; and 3. The amount of payment 
to made or obligation to be incurred does not exceed either 10 times 
the amounts paid to non-management employees in the same calendar year 
or 25 percent of the amounts paid to insiders in the calendar year 
preceding that in which the payment is to be made, as described by Yair 
Listoken, Paying for Performance in Bankruptcy: Why CEOs Should be 
Compensated with Debt, John M. Olin Center for Studies in Law, 
Economics, and Public Policy Research Paper No. 334, Yale Law School, 
p. 5, quoting Jason Brookner, Law Limits Executive Compensation, May/
June Executive Legal Advisor (2006).
    \4\ See In re Dana Corp., 351 B.R. 95 (Bankr. S.D.N.Y. 2006).
---------------------------------------------------------------------------
    Runaway executive compensation in bankruptcy takes place in two 
contexts--the context of the general explosion in executive 
compensation in American business, and the second is the unique and not 
well-understood context of corporate governance in bankruptcy.
    The bankruptcy system necessarily gives the debtor (aided by the 
bankruptcy courts) great latitude in crafting the path for businesses 
in Chapter 11 to return to financial health. Part of this approach is 
both explicitly by statute and even more so in practice for bankruptcy 
judges to grant substantial deference to both the immediate requests of 
the debtor in possession, and to give the debtor initial exclusivity in 
proposing a plan. These basic structures of the Code are absolutely 
necessary--but they left the courts ill-prepared to deal with the 
culture of CEO excess because what that culture is all about is the 
executives of the debtor in possession proposing a series of self-
enriching transactions, usually with the support of a coterie of 
experts, again paid by the debtor in possession. The Lake Wobegon 
effect that has long been noted in executive compensation is 
particularly powerful in bankruptcy, where courts tend to apply a 
reasonableness test to applications for enormous post-petition 
executive pay packages based on the representations of one or more 
consultants that this package is within the third quartile for 
companies of this type.
    The bankruptcy system has become a mere mirror of the excess found 
in the larger corporate culture. The dimensions of that excess have 
recently been explored by the House Financial Services Committee.\5\ It 
is sufficient to point out here that Chief Executive Officer pay in 350 
public companies with revenue in excess of $1 billion has risen by 300% 
in the last fifteen years, and that CEO pay is on average 411 times \6\ 
that of the average worker, up from 107 times in 1990 and 42 times in 
1980.\7\
---------------------------------------------------------------------------
    \5\ Reference recent Barney Frank hearing transcript. http://
www.house.gov/apps/list/hearing/financialsvcs--dem/hr030607.shtml. The 
AFL-CIO tracks executive pay trends in public companies on our Paywatch 
website, http://www.paywatch.org. An analysis of 2007 proxy data on 
executive pay was posted earlier this month.
    \6\ United for a Fair Economy/Institute for Policy Studies, 
``Executive Excess 2006''. Total executive compensation data based on 
Wall Street Journal survey, 4/10/2006; all other years based on similar 
sample in BusinessWeek annual surveys of executive compensation, now 
discontinued. Average worker pay is based on U.S. Department of Labor, 
bureau of Labor Statistics, Employment, Hours, and Earnings from 
Current Employment Statistics Survey.
    \7\ BusinessWeek, 4/22/2002.
---------------------------------------------------------------------------
    But runaway executive pay in bankruptcy is not just another example 
of this larger problem. There are structural reasons why when the 
excess and inequity that characterizes our corporate economy as a whole 
is moved to the bankruptcy setting it is both even less defensible and 
does significantly more harm.
    Much modern thinking in corporate governance begins from the 
distinction between constituents of the corporation with fixed 
contractual claims (lenders, suppliers, customers and workers) and 
those with variable, and in particular marginal claims (equity 
holders). But in bankruptcy the one thing that is clear is that 
contractual claims to one degree or another are not going to be 
honored.
    Secondly, the purpose of the Code is very clear--it is to preserve 
as much going concern value as possible, and in the process preserve 
the bankrupt firm for the explicit purpose of preserving both jobs and 
community economic structures. It is not to maximize the value of any 
given constituency of the firm--be that secured creditors, unsecured 
creditor, or most inappropriately, the pre-petition equity holders.
    Thus the notion, always ultimately hard to defend in any context, 
that corporate executives should be working to maximize one 
constituent's value, is particularly inappropriate to bankruptcy law. 
And yet, as recent both journalism and academic articles make clear, 
debtors are increasingly organizing themselves around one dimensional 
measures of business success that easily allow for excessive executive 
compensation when those measures are achieved.\8\
---------------------------------------------------------------------------
    \8\ See for example, Gretchen Morgenson, ``In Bankruptcy, `For 
Sale' May Mean `You Lose''' New York Times, April 15, 2007, Section 3, 
p. 1. Thus Listokin (see above) is correct to argue that executives of 
bankrupt entities should not have incentives aligned with equity 
holders. But he is wrong to suggest those incentives should be aligned 
with unsecured creditors in a similar fashion to the way many believe 
executive pay should be aligned with the outcomes of equity holders in 
solvent corporations. Whatever the merits of this sort of position with 
respect to solvent corporations that are honoring their contractual 
commitments, these arguments do not address the circumstances of an 
insolvent entity.
---------------------------------------------------------------------------
    This trend is a departure from the historic experience of 
distressed companies. Writing in 1994, Professors Stuart Gilson and 
Michael Vetsuypens found that one of the key forces ensuring 
accountability by incumbent management in a distressed company was the 
pressure from courts and creditors for executives to ``share the 
pain.''\9\
---------------------------------------------------------------------------
    \9\ Creating Pay for Performance in Financially Troubled Companies, 
Journal of Applied Corporation Finance, Winter 1994, 81-92.
---------------------------------------------------------------------------
    Congress should be most concerned about these dynamics when they 
involve management teams that have taken their companies into 
bankruptcy and then seek large compensation packages. Courts' 
indulgence of this pattern creates reasonable expectations on the part 
of company managements that they can use the bankruptcy process to wipe 
out the equity (to which they have a fiduciary duty) and renege on 
contractual commitments to the most vulnerable of the company's 
constituencies--long term employees and host communities--and they will 
be ensured of not only keeping their pre-petition compensation, they 
are likely to receive further lavish rewards in addition to the 
packages they began with.
    The result is not only an imbalance in outcomes. These arrangements 
encourage bankruptcy processes that are dominated by an alliance of 
incumbent management with subgroups of creditors to the detriment often 
of the firm as a whole (see Gretchen Morgenson's April 15 New York 
Times report of a new study of asset sales in bankruptcy) and of the 
very people the Code was intended to protect. After all, if we just 
wanted liquidations for the benefit of the secured creditors, we 
wouldn't need a Bankruptcy Code in the first place.
    The AFL-CIO believes that Congress in response to the 
destabilization of the traditional balance represented by the Code, 
should take two steps to address the problems with executive pay in 
bankruptcy. First, the sorts of procedural protections that Congress 
recently put in place with respect to KERPS should be broadened to 
cover executive pay in bankruptcy as a whole. Second, Congress should 
mandate that pre-petition executives seeking to breach contractual 
commitments to their employees should have to personally share the pain 
in an amount proportional to what they are asking their colleagues to 
bear. Such a measure would focus the minds of executives contemplating 
bankruptcy as a ``war of choice'' against their employees and their 
communities.
    The AFL-CIO looks forward to further hearings as part of a larger 
examination of the fairness of the business bankruptcy process. Thank 
you.

    Ms. Sanchez. Thank you for concluding.
    Ms. Muoneke, will you please begin your testimony?

    TESTIMONY OF ANTOINETTE MUONEKE, ASSOCIATION OF FLIGHT 
                ATTENDANTS--CWA, FEDERAL WAY, WA

    Ms. Muoneke. Thank you, Chairwoman Sanchez and Members of 
the Subcommittee for holding this hearing. My name is 
Antoinette Muoneke. I have been proud to work as a flight 
attendant for 28 years.
    After graduating from college I chose my career with a 
union contract that included a defined benefit pension plan and 
a means to follow my dream of providing for a family along with 
my own future.
    But today it sickens me that my chosen career makes me 
qualified to testify about the gross injustice taking place 
across corporate America with the blessings of the corporate 
bankruptcy laws. I will share my experiences, but I could 
easily point you to any of my colleagues. We are all facing the 
same uncertainties.
    When one of my colleagues said that she wanted the CEO of 
our company to explain to her daughter why she had to cancel 
her dance lessons, my heart knew her pain, but it gave me the 
courage to come here to tell you my story today.
    When I started my career, my union contract gave me the 
tools to have a secure future, but I knew I had to do my part. 
Saving and planning took on a more important role after the 
birth of my daughter. After a year of marriage, I found myself 
newly divorced and a single mother.
    My time off was devoted to my daughter. Our apartment near 
Seattle was rented and I was saving to buy a small condo. We 
were far from rich, but we had what we needed for a good life 
together and security for tomorrow.
    Life brings many challenges and in June of 2001 I was 
involved in a car accident that kept me off my job for a year. 
Health care expenses burned through my savings and I was forced 
to borrow against my 401(k), which at the time was only a 
supplemental source of retirement.
    In that same year, the events of September 11 were 
devastating and dramatically changed my job. Little did I know 
executives would take advantage of the industry's downturn to 
drive executive wages up and their employee wages down. I 
cannot escape the conclusion that executives used the 
bankruptcy laws to enrich themselves at the expense of workers 
like me.
    The cuts forced during bankruptcy have turned my life 
upside down. I worked full-time before, but now my hours away 
from home have increased by nearly 40 percent. My pay is now 
$5,000 less than it was prior to these long hours and 
additional days away from home. Higher medical costs have 
forced me to change my insurance to an HMO, which is fine while 
my daughter and I are healthy, but as I care for my mother, who 
has persistent health issues, I pray every day that I don't 
have to face a life-changing illness that an HMO wouldn't 
cover.
    Perhaps the most devastating change is the end of my 
retirement security. Executives terminated my 1010, and even 
with the new retirement plan, over 30 percent of my pension is 
gone and because my 401(k) is now my only retirement, I have no 
additional savings.
    I am still struggling to pay off my 401(k) loan and I have 
had to lower my 401 deferrals to 3 percent. That is the full 
amount that is required for the company's matching 
contribution, but not nearly enough to build a secure 
retirement. I will never recover the lost value of my pension, 
a pension that I have worked a lifetime to build.
    So, am I angry that my CEO has preserved his $4.5 million 
trust while he has destroyed my future security? Am I angry 
that executives have taken 40 percent or more in raises every 
year while I worry that my memory is going because I work such 
long hours? Am I angry that last year alone our CEO used the 
bankruptcy laws to take pay bonuses and stock equaling over 
1,000 times my compensation? Am I angry that his bonus is 125 
percent of his annual salary while I don't know what tomorrow 
will bring or if I will become a burden to my daughter?
    Yes. The answer is yes, I am angry. And I am tired. I was 
devastated when my union reported on a court hearing about our 
objection to enormous stock and bonus packages management 
awarded to themselves. In essence, the judge shrugged his 
shoulders and he said there was nothing he could do about it 
because the law did not give him a standard to determine how 
much is too much.
    I don't begrudge executives fair compensation, but explain 
to me this, Madam Chairperson. How is it that their pay can 
skyrocket while average workers like me have to suffer? If your 
answer to this is because the law allows it, then it is time to 
change the law.
    [The prepared statement of Ms. Muoneke follows:]
                Prepared Statement of Antoinette Muoneke
    Thank you, Chairwoman Sanchez, and members of the Subcommittee, for 
holding this hearing on the growing disparity of compensation between 
workers and executives. I especially want to thank you for providing me 
with the opportunity to testify today. I am honored and humbled to 
represent my co-workers and all of the workers who are enduring life-
changing sacrifice due to pay, healthcare, work rule and pension cuts 
forced during Chapter 11 Bankruptcy. We made painful concessions that 
affected our families, threatened our children's opportunities, 
decreased our ability to afford healthcare and destroyed retirement 
security. While workers live paycheck-to-paycheck and worry about what 
tomorrow will bring, a select few are lining their pockets with our 
sacrifices. We made these sacrifices for the long-term viability of the 
companies we worked so hard to help build and hope will continue to 
succeed.
    My name is Antoinette Muoneke, and I have been proud to work as a 
Flight Attendant for 28 years. After working my way through college, on 
a fluke I applied with United Airlines just to practice my interview 
skills shortly before graduating from the University of Washington. 
Just weeks later I was on a plane to Chicago to spend the summer 
training to be a Flight Attendant. After one year of flying a furlough 
gave way to work in advertising at Sears, which promised many 
opportunities for a good career. But when I was recalled to work at my 
airline, I chose instead to keep my career as a Flight Attendant. I 
enjoyed sharing work with colleagues who were well-educated and 
experienced professionals. And, I knew that recent Union negotiations 
had secured my retirement with a defined benefit pension plan. It was a 
thrill to meet different people every day, to contribute to a well-
respected airline and to know that I would have the means to follow my 
dream of providing for a family along with my own future. Today, 
however, it sickens me that my chosen career makes me qualified to 
testify about the gross injustice taking place in the airline industry 
and across corporate America with the blessing of corporate bankruptcy 
laws.
    Although I am certainly qualified to speak about this issue, I 
could easily point you to any one of my colleagues; we are all facing 
these same uncertainties. It is not easy to publicly display my private 
challenges, but I know that putting a face on the devastating 
circumstances families are forced to confront across our country is 
more powerful than any horrific statistics. Although I regret the need 
to testify, I hope that my personal story will help Congress root out 
this injustice that affects so many lives. For me, it was not an easy 
decision, but when one of my colleagues said that she just wanted our 
CEO to explain to her daughter why she had to cancel her dance classes 
my heart knew her pain. If I can help shed light on this inequity with 
my story, then I have the courage to share my life with you today. That 
courage is strengthened when I think about helping to rebuild a world 
with opportunity for my beautiful daughter, Obia.
    In my first days as a Flight Attendant my new life seemed 
extravagant compared with my time as a ``starving student.'' Still, my 
college lifestyle taught me to be frugal and I began saving from the 
beginning of my career. My union contract gave me the tools to have a 
secure future, but I knew I had to do my part. Saving and planning took 
on even greater meaning when my daughter was born and within a year I 
was a single mother, newly divorced. Becoming a mother was a career 
changing event. I had to rethink my schedule and work hard to maximize 
my time at home. Thanks to help from my mother in Obia's first years 
and generous assistance from a neighbor at a fraction of normal 
childcare costs, I was able to ensure my daughter had constant care and 
we lived a modest, but comfortable life. Our apartment near Seattle was 
rented, but I was steadily saving to buy a small condo in the same area 
and close to a good school.
    My time off was devoted to my daughter, and I stayed close to her 
as much as I could by volunteering or organizing charity events at her 
school. Giving back to my community is important to me and I wanted to 
share that with my daughter. We routinely volunteered to help the 
homeless by handing out sandwiches and blankets in downtown Seattle or 
serving in soup kitchens on the holidays. I have always been proud that 
I have been able to provide the tools for my daughter to excel based on 
her own developed talents. I made sure that she could attend a good 
school where she could be a good student, take part in athletics, music 
and drama. We were far from rich, but we had what we needed for a good 
life together and security for tomorrow.
    Life brings many challenges, and in June of 2001 I was in a car 
accident that kept me off the job for a year. I used vacation and sick 
leave to keep a paycheck coming, but healthcare expenses burned through 
my savings and caused me to borrow from my 401(k). At the time, 
borrowing from my 401k did not jeopardize my future when my primary 
source of retirement security was my pension plan. Before executives 
slashed my pay, benefits and pension, I could have bounced back from a 
personal setback like this.
    In that same year, the events of September 11th were devastating 
and dramatically changed the responsibilities of my job. Little did I 
know, executives were at the same time taking advantage of the industry 
downturn and the bankruptcy laws to drive executive wages up and worker 
wages down to levels I hadn't seen since the early years of my career. 
I cannot escape the conclusion that those executives have exploited the 
economic downturn and the bankruptcy laws to enrich themselves at the 
expense of workers like me.
    The cuts forced on workers during the bankruptcy have turned my 
life upside down. I worked full time before, but now my hours away from 
home have increased by nearly 40%. The airplanes are staffed with fewer 
of my colleagues even though nearly every passenger seat is filled and 
our safety and security duties have increased. We are forced to work 
longer hours, but even if I could cut back my time at work, I couldn't 
afford it. Working 40% more doesn't even make up for my loss in pay. I 
make about $5000 less than I did prior to these long hours and 
additional days away from home. While I have to find time to provide 
care for my mother who experiences persistent health issues, I cannot 
afford the good healthcare plan that we once had because the 
concessions forced by executives also included higher medical costs. I 
have had to change our insurance to an HMO, which is fine while my 
daughter and I are healthy--but as I care for my mother, I pray 
everyday that I don't have to face a life-changing illness that the HMO 
wouldn't cover.
    I am desperate to insure that my daughter continues to have access 
to her good school, the Olympic development soccer program she's 
qualified for and her piano lessons. I know that the only way she will 
be accepted to college these days is to stand out as extraordinary. 
And, the only way to have a chance for a better life, the life we used 
to lead, is to get an education. Even so, the cost of college weighs 
heavy on my mind and we both hope for an athletic scholarship. But that 
means keeping up with her activities and paying for them. I have to 
juggle bills every month, worry about our rent and I am not always able 
to be at home to get her to practice or games. We have to depend upon 
other families to pick her up, and it kills me not to be able to 
reciprocate. I have had to stop my charity work due to time 
constraints, but this too causes an additional financial burden since 
her school increases tuition costs when charitable quotas are not met.
    Perhaps the most devastating change is the end of my retirement 
security. With my pension plan terminated less than two years before I 
could qualify for retirement, my accrued defined benefit is subject to 
heavy penalties when paid by the Pension Benefit Guarantee Corporation. 
Even with the new retirement plan, over 30% of my pension benefit is 
gone. And because my 401k is now my only retirement, I don't have any 
additional savings. I am still struggling to pay off my 401k loan, and 
I've had to lower my 401k deferrals to just 3%. That's the full amount 
required for the company matching contribution, but not nearly enough 
to build a secure retirement. I will never be able to recover the lost 
value of my pension--a pension I worked a lifetime to build. A pension 
promised instead of increases to pay and other Contractual benefits. A 
pension that helped me choose this as my career.
    So, am I angry my CEO was able to preserve his $4.5 million pension 
trust while he destroyed my future security? Am I angry that executives 
have taken 40% or more in raises every year while I worry that my 
memory is going because I work such long hours? Am I angry that last 
year alone our CEO used the bankruptcy laws to take pay, bonuses and 
stock equaling over 1000 times my compensation? Am I angry that his 
bonus is 125% of his annual salary while I don't know what tomorrow 
will bring or if I will be a burden to my daughter? Yes, I'm angry, and 
I'm tired.
    I was devastated when my union reported what happened in court when 
we objected to the enormous stock and bonus packages management awarded 
to themselves. In essence, the judge acknowledged our concern, but 
shrugged his shoulders and said there was nothing he could do about it 
because the law did not give him the authority to second guess 
management compensation, or a standard by which to determine ``how much 
is too much.''
    Airline executives were well paid before the bankruptcy and I don't 
begrudge them fair compensation. But explain to me this, Madame 
Chairperson, how is it that their pay can skyrocket while the average 
worker is made to suffer like this? If your answer is that it's because 
the law allows it, then it's time to change the law.
    I want to thank you again for giving me the opportunity to testify 
today. I will answer any questions that you may have.

    Ms. Sanchez. Thank you, Ms. Muoneke.
    Ms. Muoneke. I want to thank you for giving me this 
opportunity.
    Ms. Sanchez. Thank you for your testimony. I know it has 
been a very difficult road for you to get here and to give your 
testimony, and we appreciate hearing from your perspective.
    Mr. Wintner, please begin your testimony.

            TESTIMONY OF MARK S. WINTNER, ESQUIRE, 
          STROOCK & STROOCK & LAVAN LLP, NEW YORK, NY

    Mr. Wintner. Thank you, Madam Chairman and Members of this 
Subcommittee.
    The issues regarding executive compensation are not limited 
to Chapter 11, as many of the Members and panelists have 
mentioned before. That exists both inside and outside of 
Chapter 11. However, to focus in on Chapter 11 compensation 
without looking at compensation as a whole, leaves Chapter 11 
companies in distinct competitive disadvantage in terms of 
retaining or attracting key executives and key employees during 
the Chapter 11.
    I am not here to defend or criticize the 503(c) 
restrictions that were put on retention payments and severance 
payments. As alluded to earlier, I do note that the new rules, 
particularly on retention payments, are so restrictive as to 
virtually have made them disappear and, as a result, somewhat 
predictably, as also noted, the focus has shifted on pay-to-
stay plans, which are really no longer tolerable for insiders 
under the Chapter 11 rules to pay for performance or pay for 
value.
    I submit that the continued validity and health of those 
programs are essential to many Chapter 11 reorganizations.
    Incentive pay in Chapter 11 enables debtors to compete in 
the marketplace. That marketplace already, outside of Chapter 
11, includes a typical package of salary, bonus, long-term 
incentive plans, equity, severance, change of control and other 
arrangements. Right now, a Chapter 11 company cannot offer all 
of those things.
    To further cut back on the ability of a Chapter 11 company 
to compensate and incentivize its executives will only lead to 
exodus of executives. I am not going to pretend that every 
executive is going to leave in that circumstance. Some will and 
some won't. But it becomes increasingly difficult to replace 
executives.
    If you have good executives and they stay and they are 
under-compensated, you are lucky. If you have good executives 
and they don't stay because they are under-compensated--and 
under-compensated, I am not addressing the broader issue of 
what executive compensation should be to rank and file 
compensation in the universe of the marketplace, just why 
Chapter 11 companies cannot be put at a negative disadvantage 
to the rest of the marketplace.
    If you want to replace management because they are not 
doing a good job and are trying to attract somebody and you 
cannot fairly compensate them, you are effectively asking them 
to leave a marketplace where they are not restricted to enter a 
marketplace where they are restricted in the context of a 
company which may or may not have a long-term future. That is 
very hard to do, virtually impossible.
    Now, the courts have developed since the advent of the 2005 
restrictions the emphasis on incentive pay instead of retention 
pay. Although we are still in the infancy of it, we are about 
18 months in, it is working tolerably well. Executives are 
receiving lower packages than they did pre the 2005 reform 
amendments and some of the--in fact I think almost all the 
cases alluded to today predated the advent of those 2005 
amendments.
    The courts that have addressed it have addressed it under a 
business judgment rule, which is not an automatic stamp. There 
are several factors that need to be passed before the 
bankruptcy court will approve it.
    I think it is not coincidental that in addition to the 
changes made between Dana 1, where the bankruptcy court in New 
York rejected the package as being too much like a retention 
plan and not enough like an incentive plan, and the approval 4 
months later of the revised program, which was revised in many 
respects but equally significant, the Official Creditor 
Committee, the Ad Hoc Bond Holders Committee and other 
significant parties to Dana all opposed management in the 
consideration of the Dana 1 proposal and the court ruled 
against it.
    The creditor bodies, at least, although not the labor 
organizations, supported the revised program for Dana 2 and it 
was approved. It was approved, therefore, with at least the 
input and the active participation and negotiation by other 
parties to the bankruptcy.
    Nobody feels good about lost jobs, but nobody has 
demonstrated that capping compensation for executives is going 
to preserve those jobs. To the extent it simply leads more 
companies into liquidation or more likely into asset sales so 
as to get themselves out of both the restrictions of Chapter 11 
as well as the relentless marketplace pressure on those 
troubled companies, that is not going to be good for anybody.
    Thank you, Madam Chair.
    [The prepared statement of Mr. Wintner follows:]
                 Prepared Statement of Mark S. Wintner
    By way of background, I am a partner in the law firm of Stroock & 
Stroock & Lavan LLP and head of the Firm's ERISA and Employee Benefits 
Group. I have specialized for over three decades on a broad range of 
employee benefit and compensation issues, and have worked extensively 
on the employee benefit and compensation aspects of bankruptcy and 
reorganization proceedings. Specifically, I have been involved in 
advising debtors, official creditor committees, ad hoc bondholders 
committees and individual and groups of creditors, investors and 
purchasers on benefits and/or compensation matters in numerous Chapter 
11 reorganization proceedings, including Delta Airlines, Brooklyn 
Hospital, Dana Corp., Loral Space & Communications, Anchor Glass, 
Columbia Gas, Piper Aircraft, LTV Steel, Pan Am, Federated Department 
Stores, Wheeling-Pittsburgh, Coleco, Flushing Hospital, Raytech and 
W.R.Grace.
    I also lecture frequently on employee benefit and compensation 
matters in bankruptcy and have been a speaker for the American Bar 
Association (ABA), Practicing Law Institute (PLI), ALI-ABA and the 
Society of Actuaries, among others. I am a member of the American 
College of Employee Benefits Counsel and the ABA Joint Council of 
Employee Benefits.
    The views stated herein are solely those of the author, and do not 
necessarily reflect the views of my Firm or any of its partners or of 
any Firm clients, past or present.
    The very title of the hearing, ``Executive Compensation in Chapter 
11 Bankruptcy Cases: How Much is Too Much,'' suggests that there may be 
an objective standard which would enable bankruptcy courts and 
interested parties in Chapter 11 cases to discern when executive 
compensation crosses the line from ``enough'' to ``too much.'' In my 
opinion, there is no feasible way of making such a judgment and, 
moreover, if there were it would vary from company to company, would 
not apply uniformly to different executives within the same company and 
would certainly change over time.
    As the Subcommittee is aware, the subject of executive compensation 
in Chapter 11 cases was addressed by Congress just two years ago, as 
part of the Bankruptcy Abuse Prevention and Consumer Protection Act 
(the ``Bankruptcy Reform Act''). The Bankruptcy Reform Act added 
Section 503(c) to the Bankruptcy Code, effective for Chapter 11 cases 
filed on or after October 17, 2005. Section 503(c) acts as a limitation 
on the authority conferred under Section 503(b) to allow administrative 
expenses of the Chapter 11 debtor's estate. Section 503(c) directs that 
even if a claim for compensation would otherwise satisfy the 503(b) 
requirements for administrative expenses, the claim will not be allowed 
(by the Bankruptcy Court) nor paid (by the debtor) if it falls into any 
of the three paragraphs of subsection (c), summarized below:
    (1) covers retention compensation to be paid to an insider of the 
debtor, such as the debtor's directors, officers or other persons in 
control of the debtor, unless the bankruptcy court makes a finding 
based on the record that such payment is (i) essential to retaining the 
insider because the person has a bona fide job offer from another 
business at the same or greater rate of compensation and (ii) the 
services provided by the person are essential to the survival of the 
business. In addition, the court may only approve retention 
compensation programs that are capped at no greater than ten times the 
amount of similar payments provided to non-management employees, or if 
no such similar payments were made, no more than 25% of the amount of 
any similar payments made to such insider for any purpose during the 
year prior to the year in which such payment is to be made;
    (2) covers severance to be paid to an insider of the debtor, unless 
(i) the payment is part of a program that is generally applicable to 
all full time employees and (ii) the amount of the payment does not 
exceed ten times the amount of the mean severance pay given to non-
management employees during the calendar year in which the severance 
payment to the insider is made;
    (3) covers post-petition transfers or obligations incurred for the 
benefit of officers, managers or consultants, if such transfers or 
obligations are outside the ordinary course of business and not 
justified by the facts and circumstances. This provision would apply to 
incentive compensation and bonus plans.
    The focus of this statement is on the type of compensation programs 
commonly referred to as key employee retention plans, or KERPs, and in 
particular, performance based KERPs. Prior to the enactment of the 
Bankruptcy Reform Act, KERPs had been used to provide certain high-
level employees of a debtor with compensation to induce them to stay 
with a debtor throughout a reorganization, in addition to the 
employee's base salary. These programs covered a wide range of benefits 
from severance pay to retention arrangements to success bonuses. They 
may have been structured to pay out if an employee remained employed 
through a particular date or event (sometimes referred to as a ``stay 
bonus''), upon the occurrence of reaching certain business targets, or 
if the company terminated the employee. Historically, a debtor would 
use a KERP for employees that it considered integral to the operation 
(and if applicable, the reorganization or wind-down) of the company, 
and that it felt were necessary to retain during the uncertain times of 
the reorganization, much like a company outside of reorganization would 
use an incentive program to retain employees during uncertain times 
such as a downsizing or merger. Before the Bankruptcy Reform Act, 
bankruptcy courts applied the business judgment rule to the proposed 
KERP (i.e., the court would typically approve a KERP if it was 
persuaded that the debtor used sound business judgment, there was a 
legitimate business justification and the compensation program was fair 
and reasonable).
    As discussed above, Section 503(c) of the Bankruptcy Code severely 
limits the amount of retention compensation and severance which can be 
paid to the debtor's insiders. In effect, the limitations on retention 
(or stay) payments and on severance as set forth in Section 503(c)(1) 
and (2), respectively, have already answered the question as to how 
much is too much for those types of payments. However, KERPs which are 
performance driven can still be reconciled with the new law.
    Since Section 503(c) became effective less than two years ago, the 
decisions (published and unpublished) analyzing and applying the 
Section 503(c) restrictions are limited, however, even with this 
limited case law, it is beginning to come clear how courts have viewed 
the changes to the Bankruptcy Code. The case law has focused on whether 
the proposed plan is a ``pay to stay'' compensation plan, primarily 
used to retain employees and thereby subject to the limits of Section 
503(c), or a ``pay for value'' compensation plan, primarily used as an 
incentive for employees to reach certain goals and a reward upon 
attainment of those goals and, therefore, subject to the standards of 
the business judgment rule.
    One of the first cases to discuss Section 503(c) was In re Nobex 
Corp., No. 05-20050, 2006 Bankr. LEXIS 417 (Bankr. D. Del. Jan. 19, 
2006). In that case, the debtor sought to pay its chairman (acting as 
its chief executive officer) and its vice president of finance and 
administration incentive bonuses in addition to their regular 
compensation. The incentive bonuses were to be paid only in the event 
of a sale of the debtor and only if the sale price exceeded a certain 
threshold. The debtor argued that the chairman and vice president were 
necessary for a successful sale of the company and that they were 
committed to their employment even if no incentive compensation was 
paid. The court found that the plan was not an inducement for the 
chairman and vice president to stay with the debtor, but rather an 
inducement to increase the price received by the debtor in a sale, 
which would ultimately result in a greater recovery for creditors. The 
plan was approved by the court using the business judgment standard, 
not the Section 503(c) standard.
    In the case of In re Calpine Corp., No. 05-60200, the court 
approved a compensation program that included four different types of 
incentive payments. The program provided for payment of (i) bonuses 
upon the debtor's emergence from Chapter 11, (ii) bonuses based on the 
debtor's achievement of certain performance goals established by the 
debtor in consultation with various creditor constituencies, (iii) a 
supplemental bonus to non-insiders who performed a critical function at 
the debtor and were at significant risk of being hired by another 
company and (iv) a discretionary bonus to non-insiders. The court 
approved the latter two components of the compensation program outside 
of Section 503(c) because the payments were to non-insiders. The court 
also held that the emergence bonus and performance bonus were outside 
of Section 503(c) because they were incentive plans not retention 
plans.
    In In re Dana Corp., 351 B.R. 96 (Bankr. S.D.N.Y. 2006), the court 
rejected the debtor's proposed compensation program for senior 
officers. Notably, this was the same court that approved the Calpine 
program months earlier. The Dana compensation program, as initially 
presented, included a completion bonus that paid out on the debtor's 
emergence from bankruptcy, without regard to the actual performance of 
the company. The court held that since nothing was required of the 
employees other than remaining with the company through emergence, and 
it did not meet the requirements of Section 503(c), it was an invalid 
retention program. As Judge Lifland stated in the Dana opinion, ``If it 
walks like a duck (KERP) and quacks like a duck (KERP), it's a duck 
(KERP).'' Dana subsequently revised its program to include performance 
criteria and sought approval of the revised plan. With these 
significant changes, the court approved the program.
    In the recent decision of In re Global Home Products, LLC, 2007 
Bankr. LEXIS 758 (Bankr. D. Del. March 6, 2007), the debtor sought 
approval of a management incentive plan which would award certain 
eligible employees a bonus equal to a percentage of base salary on a 
quarterly basis if minimum EBITDAR (Earnings Before Interest, Taxes, 
Depreciation and Rent) and/or cash flow objectives were achieved. The 
management plan was very similar to prior year incentive plans. The 
court analyzed and approved the plan outside of Section 503(c), holding 
that the plan was intended to incentivize management, not retain them. 
As part of its analysis, the court considered that in the prior year, 
under a similar plan, no bonuses were paid since the targets were not 
met.
    Retaining or attracting key employees, directors or consultants is 
important for any company, whether in or out of Chapter 11, but Chapter 
11 debtors have additional problems in this regard, most notably the 
inescapable fact that the future of the company is more uncertain than 
usual and that they cannot offer equity compensation during the 
reorganization proceeding. The Bankruptcy Reform Act has significantly 
curtailed the use of retention (or stay) bonuses and severance as 
meaningful incentives. Therefore, in addition to market competitive 
salaries and annual bonuses, performance based KERPS are the most 
significant means for a debtor to compensate insiders and remain 
competitive with other prospective employers. The ability to do so is 
not only important to debtors and insiders themselves, but to the 
creditors and other interested parties whose recoveries depend upon 
maximizing the value of the debtors.
    The early experience with Section 503(c) is that the bankruptcy 
courts, after taking into account the view of the various creditor 
constituencies and other interested parties, are developing a workable 
set of rules which will enable insiders to be compensated on a 
competitive basis, but only if their performance has been beneficial to 
the estate. There is no need to impose limits on that process, 
particularly so soon after the Bankruptcy Reform Act. Any attempt to 
impose a one-size fits all absolute dollar or percentage limit on ``pay 
for value'' KERPs will frustrate the ability of the interested parties 
to design incentive compensation suitable for the particular needs of 
the debtor and be detrimental to the Chapter 11 process.

    Ms. Sanchez. Thank you, Mr. Wintner.
    Mr. Levin, will you please begin your testimony?

             TESTIMONY OF RICHARD LEVIN, ESQUIRE, 
          NATIONAL BANKRUPTCY CONFERENCE, NEW YORK, NY

    Mr. Levin. Thank you, Madam Chair, and thank you also, and 
the Members of the Subcommittee, for inviting the National 
Bankruptcy Conference to be heard on this very important issue 
in Chapter 11.
    As I note in my prepared testimony, I am here on behalf of 
the Conference, not on behalf of my law firm or any clients, 
and I am speaking only on behalf of the Conference.
    This is a difficult and painful topic, as Ms. Muoneke's 
testimony so eloquently stated. Bankruptcy results in loss to 
many, and yet it is important that bankruptcy policy do 
whatever it can to enhance the value of what is there, whether 
through reorganization or through a liquidation proceeding, and 
it is important that people be there to carry out their duties 
to enhance the value of the company, so that what is left will 
be greater than if everybody just walks away.
    There is most definitely a fairness element in determining 
executive compensation in bankruptcy that has to be balanced 
against the need to secure the services of executives and 
middle-level and senior managers to run a company while it is 
in bankruptcy or to run the liquidation. But the fairness 
element cannot be served by going too far in either direction, 
by permitting everything or by prohibiting everything.
    Section 503(c), enacted 2 years ago, in fact almost exactly 
2 years to the day ago, made an attempt at restoring some 
balance to an executive compensation system in bankruptcy that 
had been subject to very great abuses. Nobody can question 
that.
    It has its problems in the way it was drafted and 
implemented. It is a very difficult and unworkable provision. 
But it has served an important purpose in sensitizing the Bar 
and more importantly the Bench to the issues surrounding 
executive compensation and to providing some appropriate 
restrictions, although in our view we think perhaps the 
restrictions are more than are necessary to create this 
balance.
    From our perspective, we look at bankruptcy policy and what 
is important in bankruptcy policy. We think bankruptcy policy 
is designed to preserve value and to promote fairness among 
constituencies that must make sacrifices, and with that we have 
four principles that we would state to govern any executive 
compensation legislation.
    First, each case is unique. You cannot have a one-size-
fits-all solution for all of the varied kinds of companies in 
reorganization. Second, consistent with the overall purpose of 
the bankruptcy laws, negotiation is the way to resolve these 
issues. And there should be adequate time given to the parties 
to negotiate resolutions. Neither side should be able to impose 
its will.
    And, finally, we think basic fairness can be best promoted 
by focusing on the compensation of what we will call ``senior 
management,'' or senior executives rather than mid-level 
management, who usually--and the difference here is that senior 
executives tend to have the opportunity to have much more 
influence and almost set their own compensation, whereas below 
the top level, that is less true.
    And based on those principles, we would make two general 
recommendations. The first is that there should be procedural 
rather than substantive limitations imposed in the area of 
executive compensation. Substantive limitations that are too 
rigid will defeat the purpose, because they will violate the 
one-size-fits-all policy. Every case is unique. But procedural 
limitations will give parties time to get to the bargaining 
table and negotiate appropriate compensation arrangements to 
keep the people needed to preserve value and yet not let it go 
too far and give everybody time to be heard before the court.
    And second, we would propose that 503(c) or any future 
amendment of it be limited to the senior executives as the SEC 
defines that term for proxy reporting purposes. They are really 
the five most highly compensated executives who have an 
executive role. It doesn't encompass the star performer who is 
not an executive who needs to be paid to perform and achieve 
value.
    We think that would loosen the restrictions on people like 
Mr. Allen in Enron, that Mr. Silvers has discussed, and still 
focus on the top. All of the discussion this morning has been 
on the one or two people at the top, and that is where we think 
the SEC has got it right, and we would suggest that that be 
carried over into the bankruptcy area as well.
    Thank you, Madam Chairman. I am ready to answer any 
questions.
    [The prepared statement of Mr. Levin follows:]
                Prepared Statement of Richard Levin \1\
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    \1\ Partner, Corporate Restructuring Department, Skadden, Arps, 
Slate, Meagher & Flom LLP, New York, NY. The views expressed in this 
testimony are expressed solely on behalf of the National Bankruptcy 
Conference and do not necessarily represent the views of Mr. Levin, 
Skadden, Arps, or any of its clients.
---------------------------------------------------------------------------
    The National Bankruptcy Conference appreciates the opportunity to 
participate in these oversight hearings on executive compensation in 
chapter 11 cases and thanks the Subcommittee for its invitation. The 
topic is important to the administration of chapter 11 cases and 
preservation of jobs and value for all constituencies and equally 
important to maintaining fairness in reorganization. We commend the 
Subcommittee for focusing on this issue in its review of the 2005 
bankruptcy amendments.
    The Conference is a voluntary, non-profit, non-partisan, self-
supporting organization of approximately sixty lawyers, law professors 
and bankruptcy judges who are leading scholars and practitioners in the 
field of bankruptcy law. Its primary purpose is to advise Congress on 
the operation of bankruptcy and related laws and any proposed changes 
to those laws. Attached to this statement is a Fact Sheet about the 
Conference, including a list of its Conferees. Also attached is a 
Background Report on Executive Compensation Issues that was prepared by 
the Conference's Employee Benefits and Compensation Committee (the 
``Background Report'').
    Executive compensation has occupied headlines recently, and not 
just in bankruptcy cases. See Background Report, at [28-32]; 
``Transparency: Lost in the Fog,'' New York Times, Apr. 8, 2007, at 
BU1. In chapter 11 cases, the principal focus has been on retention, 
severance and incentive plans, especially since the 2005 addition to 
the Bankruptcy Code of section 503(c). This section, which was added by 
section 331 of the Bankruptcy Abuse Prevention and Consumer Protection 
Act of 2005,\2\ imposes restrictions on the ability of a chapter 11 
trustee or debtor in possession to implement retention, severance, or 
incentive compensation plans for its ``insiders.'' \3\
---------------------------------------------------------------------------
    \2\ Pub. L. 109-8, Sec. 331, 119 Stat. 23, 102, (2005).
    \3\ ``The term `insider' includes--
---------------------------------------------------------------------------
      . . .
      (B) if the debtor is a corporation--
          (i) director of the debtor;
          (ii) officer of the debtor;
          (iii) person in control of the debtor;
          (iv) partnership in which the debtor is a general 
      partner;
          (v) general partner of the debtor; or
          (vi) relative of a general partner, director, officer, 
      or person in control of the debtor;''.
11 U.S.C. Sec. 101(31).
    To start, a definition of terms might be helpful to an 
understanding of the issues that section 503(c) presents. In common 
parlance, retention plans usually involve payments to employees who 
stay with the company for defined periods of time, even if their 
employment is not terminated. Retention plans are designed to give 
employees an incentive not to seek employment at another firm even 
though they may not be threatened with imminent loss of their jobs. 
Another job at a healthy company, even at reduced compensation, might 
seem more attractive than remaining with a chapter 11 debtor in 
possession, where employees face the stress and difficulty of operating 
a company in chapter 11 and the ultimate risk of being fired due to a 
reduction in the company's labor force or even liquidation of the 
enterprise.
    A severance plan involves payments to employees upon the company's 
termination of their employment to cushion the impact of losing their 
job and to provide them time to seek alternative employment. In the 
bankruptcy environment, where, for many employees, the prospect of 
termination is on the immediate horizon, severance plans also serve the 
goal of retention by discouraging employees from seeking to leave the 
company in advance of being laid off. A severance plan is particularly 
appropriate where employees know they will be ``working themselves out 
of their jobs,'' for example, by overseeing a liquidation or sale of 
the company. The better the employees perform in the liquidation or 
sale process, the faster they lose their jobs. All constituencies 
benefit from a swifter conclusion to the process. Retention and 
severance plans thus serve a common purpose in chapter 11 cases--
keeping employees from seeking other employment for as long as the 
debtor company needs them.
    An incentive plan, by contrast, is designed to motivate employees 
to achieve financial or other performance targets. The targets might be 
ordinary operating performance targets or targets relating to the 
reorganization or liquidation of the company. Although the incentive 
compensation will not be paid if the employee leaves the company before 
the relevant performance target has been met (which discourages the 
employees from leaving), an incentive plan's primary purpose is 
enhanced performance, not retention.
    Incentive and severance plans are common among companies not in 
financial distress and often are required for a company to provide 
competitive compensation for middle and senior managers. See In re 
Pliant Corp., Case No. 06-10001 (MFW) (Bankr. D. Del. Mar. 14, 2006) 
(prepetition incentive plan). Retention plans, though less common in 
the non-distress context, are also sometimes seen.
    Properly designed, all three kinds of plans can enhance the 
viability and value of a business, and can serve a proper purpose in 
business in general and in reorganization cases in particular. See In 
re AirWay Indus., Inc., 2006 WL 3056764 (Bankr. W.D. Pa. Oct. 3, 2006) 
(secured creditor underwrote incentive plan out of its own collateral 
proceeds to motivate employees to produce better recoveries). In 
chapter 11 cases, properly designed plans can be in everyone's interest 
because they preserve the business and jobs, and, ultimately, enhance 
creditor recoveries.
    The difficulty, however, lies in ensuring that such plans are used 
in an appropriate way and are not excessive in light of their 
legitimate purposes. There is an obvious risk that such plans will be 
designed by managers to enhance their own compensation and will be more 
generous than strictly necessary to preserve the value of the business. 
While this risk exists at a non-bankrupt company, in a bankruptcy 
company, where other employees are being terminated or being asked to 
make sacrifices and creditors are incurring significant losses, there 
is a heightened concern over both unfairness and corporate waste.
    In view of this potential for abuse, the National Bankruptcy 
Conference believes that bankruptcy procedures should be designed so 
that retention, severance, and incentive plans in chapter 11 cases are 
tailored to their legitimate objectives--preserving the debtor's 
business and enhancing its value--but are not excessive. In designing 
such procedures, however, care must be taken not to sweep so broadly 
that appropriately tailored retention, severance and incentive plans 
are impossible to implement. If the standards for authorization of such 
plans are too rigid or impractical, the goals of reorganization, 
preservation of jobs and enhancement of value may be thwarted, or, 
perhaps worse, parties will have an incentive find creative ways of 
circumventing the rules to meet the economic needs of the business. The 
Conference believes an appropriate balance must be struck.
    Section 503(c) ostensibly was designed to address the unfairness 
and waste issues by limiting overly generous ``pay to stay'' packages 
for the executives who themselves are setting the payments. However, in 
its current form the provision can be criticized on a number of 
grounds.
    To start, the section imposes impractical requirements. It permits 
retention plans only on an employee-by-employee basis, because it 
requires a showing as to the unique circumstances of each employee that 
would be covered. It applies only when an employee already has ``a bona 
fide job offer at the same or greater rate of compensation'' and when 
the services of such employee are ``essential to the survival of the 
business''--requirements that are unlikely ever to be met. If an 
employee sought out and received such a ``bona fide job offer at the 
same or greater compensation,'' it is unlikely the employee would 
choose to await the outcome of a hearing on a retention plan before 
deciding to accept the other offer. The ``bona fide job offer'' 
requirement defeats the principal purpose of a retention program, which 
is to keep employees from seeking other employment in the first place. 
The ``essential to survival'' requirement is difficult to meet in a 
moderate sized to large company, because the loss of any given employee 
will seldom be a genuine threat to the company's ultimate survival. The 
loss of a key employee may hurt the company, and the loss of a large 
group of such persons may threaten the company's survival, but it will 
be almost impossible to show that retaining a single individual is 
``essential to survival of the business.''
    Even if these facts could be shown, the section takes a formulaic 
approach to what payments may be made. This ``one size fits all'' 
approach limits the ability of the debtor in possession to design a 
retention program that is responsive to the needs of its operations, 
employees and competitive environment so that the objectives of the 
program to retain key employees can be achieved.
    The section is also overbroad compared to the principal problem it 
was intended to address--senior executives lining their own pockets 
while other employees suffer. It can be read essentially to restrict 
even legitimate and necessary retention and severance programs for mid-
level managers who have no control or influence over their own 
compensation but who can often provide substantial value to a company 
in distress if they stay and do their jobs.
    Finally, ambiguities in the provision generate distracting and 
destabilizing litigation at the delicate early stages of a chapter 11 
case over the distinction between prohibited ``retention'' plans and 
permitted ``incentive plans,'' as well as over who is an ``insider'' 
covered by the section, and who is not. Such litigation highlights to 
employees the uncertainty of their status just when the company has an 
urgent need to calm its workforce due to the initial shock of the 
bankruptcy filing.
    These and other effects of section 503(c) are described in greater 
detail in the Background Report submitted with this testimony and in 
the ``Memorandum on the Impact of Section 503(c) of the Bankruptcy Code 
and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
on Executive Compensation,'' adopted by the Executive Compensation 
Committee of the American College of Bankruptcy, which we understand 
has been submitted to the Subcommittee for inclusion in the record of 
this hearing.
    Despite its flaws, however, there is no question that section 
503(c) has served the salutary purpose of sensitizing courts, 
creditors, and U.S. trustees to the issues of inappropriate executive 
compensation packages and has properly shifted the compass toward a far 
more reasonable approach to the issue. The National Bankruptcy 
Conference would suggest, however, that in the interest of all 
participants in the reorganization process, especially the debtor in 
possession's non-management employees, a more nuanced and balanced 
approach to executive retention issues is needed--an approach that 
preserves the new law's salutary effects, but also takes into account 
other important chapter 11 policies, like preserving and maximizing the 
value of a reorganizing debtor's business.
    Our reorganization laws are premised on the idea that the value of 
an enterprise as reorganized often will exceed its liquidation value. 
Reorganizing permits the company to improve its operations, enhance its 
value, preserve jobs, and reduce sacrifices that need to be made by all 
constituencies. As this Committee recognized in proposing chapter 11 30 
years ago:
    The purpose of a business reorganization case, unlike a liquidation 
case, is to restructure a business's finances so that it may continue 
to operate, provide its employees with jobs, pay its creditors, and 
produce a return for its stockholders. The premise of a business 
reorganization is that assets that are used for production in the 
industry for which they were designed are more valuable than those same 
assets sold for scrap.\4\
---------------------------------------------------------------------------
    \4\ H. Rep. No. 595, 95th Cong. 1st Sess. 220 (1977); see NLRB v. 
Bildisco & Bildisco, 465 U.S. 513, 527, 104 S. Ct. 1188, 79 L. Ed. 2d 
482 (1984) (``the policy of Chapter 11 is to permit successful 
rehabilitation of debtors''); United States v. Whiting Pools, Inc., 462 
U.S. 198, 203, 103 S. Ct. 2309, 76 L. Ed. 2d 515 (1983) (``Congress 
presumed that the assets of the debtor would be more valuable if used 
in a rehabilitated business than if sold for scrap.'').
---------------------------------------------------------------------------
    The objective of maximizing the value of the enterprise is distinct 
from the question of how that value, once maximized, should be 
allocated among creditors, shareholders, employees, and other 
stakeholders. It is proper to ask whether the value of the enterprise 
is being equitably distributed, but it is self-defeating if the method 
of effecting an equitable distribution among the parties reduces the 
value that is available to distribute. Generally speaking, therefore, 
issues of equitable distribution should be resolved only after 
appropriate steps have been taken to preserve and maximize the value of 
the business. The Bankruptcy Code was designed to facilitate such 
maximization (for example by permitting sale of unproductive assets, 
assumption of beneficial contracts and rejection of burdensome ones) 
and to encourage negotiations over the equitable distribution issue, 
with ultimate recourse to the court if the distribution issue cannot be 
consensually resolved.\5\
---------------------------------------------------------------------------
    \5\ See Richard Broude, Cramdown and Chapter 11 of the Bankruptcy 
Code: The Settlement Imperative, 39 Bus. L. 441 (1984).
---------------------------------------------------------------------------
    Labor issues in general, and executive retention and severance 
plans in particular, pose difficulties in the chapter 11 context 
because they typically intermingle and often create a conflict between 
the equitable allocation of sacrifice among employees and other 
constituencies on the one hand and the objective of maximizing 
reorganization value on the other. The Conference believes, however, 
that these apparently conflicting objectives can in fact be reconciled 
in the case of executive retention, severance, and incentive plans if a 
somewhat different approach from the one taken in section 503(c) is 
adopted. In the view of the Conference, this approach should take into 
account several basic principles:

          First, the approach adopted should recognize that 
        each case presents a unique combination of demands on 
        management, employees, and creditors, and that a one-size-fits-
        all formula to address executive retention and severance is too 
        constraining to accomplish the bankruptcy objectives of 
        maximizing value of the debtor's business and preserving jobs.

          Second, the approach adopted should also recognize 
        that, for the vast majority of employees--those who do not 
        control decisions relating to their own compensation--
        appropriate retention, severance, and incentive plans are 
        matters that should be resolved by negotiation between the 
        debtor in possession and the stakeholders in the case.

          Third, the approach adopted should assure relevant 
        parties adequate time to familiarize themselves with the 
        underlying facts and needs of the business and to negotiate and 
        resolve the issues or put them before the bankruptcy court.

          Finally, the approach adopted should address the 
        basic fairness issue: preventing a limited number of senior 
        management decision makers to reward themselves by designing 
        for themselves excessively generous retention and severance 
        arrangements while other employees and creditors are being 
        called upon to accept sacrifices.

    The NBC suggests two principal changes from current law that would 
help implement these principles:

          First, procedural limitations should be imposed to 
        prevent adoption of compensation plans for senior officers of 
        the company at such an early stage in the case that the 
        constituencies (including those representing hourly employees) 
        are not yet ready to participate in the negotiation of 
        reasonable and balanced solutions. Any proposed program for 
        senior officers should be debated by the parties and considered 
        by the bankruptcy court in broad daylight and only after all 
        key constituencies have had the opportunity to scrutinize the 
        program and express their views. A reasonable minimum notice 
        period should be imposed to allow a creditors' committee to be 
        formed and to provide the committee and other parties a fair 
        opportunity for review of the proposed program, and, if 
        agreement is not reached, for there to be a fair opportunity 
        for the parties to be heard before the court.

          Second, limitations on retention, severance, and 
        incentive plans like the ones in section 503(c) should be 
        specifically targeted against those senior executives who are 
        in a position to make self-serving compensation decisions, and 
        a more traditional business judgment test, which focuses on 
        preservation of the value of the business, should be applied to 
        authorization of such plans with respect to other employees.

    The reasons for this more targeted approach are straightforward. A 
large company may have dozens of officers, such as vice presidents, a 
treasurer, a controller, and assistant vice presidents and treasurers, 
elected to officer positions by the board, who might be considered 
``insiders'' covered by the current limitations in section 503(c). The 
real risk, however, of over-reaching, over-compensation and abuse lies 
not with this larger group of employees, but rather with the senior 
executives who play a role in setting compensation, usually the chief 
executive officer and a few other top executives.
    The SEC has addressed this risk in the non-distress context by 
requiring disclosure of compensation of the top five most highly 
compensated executive officers. See Item 402(a), SEC Regulation S-K. 
This group generally would not include, for example, the star sales 
manager, the key engineer, the plant manager or the like, who may 
technically be an ``officer'' or ``insider'' of the company but who has 
no role in setting compensation. Adoption of the SEC dividing line to 
determine whose compensation is subject to heightened scrutiny in a 
chapter 11 case would help to assure fairness and avoid abuse, while at 
the same time not placing at excessive risk the important bankruptcy 
objectives of preserving the business, enhancing its value and 
ultimately increasing the likelihood of a successful reorganization 
that will minimize the hardships to be borne by all parties.
    Limiting the restrictions of section 503(c) to the senior 
executives in control of compensation decisions will permit debtors in 
possession, where necessary and appropriate, to offer the incentives 
necessary to keep key middle managers and star performers focused on 
their jobs, without generating expensive, time-consuming, and 
distracting litigation. The process would likely be self-regulating and 
self-limiting, because CEO's and other senior executives are unlikely 
to propose excessive compensation for mid-level officers or junior 
employees if they are prohibited from providing excessive compensation 
for themselves. Regulating the top of the compensation pyramid is the 
best way to assure that other employees are offered only what is 
genuinely necessary to retain their services in the interest of the 
business.
    Once again, I would like to thank the Chair and the rest of the 
Subcommittee for inviting the National Bankruptcy Conference to testify 
in these important hearings. The Conference would be pleased to 
consider this issue further if the Subcommittee desires, and we would 
be prepared to formulate detailed drafting proposals if the 
Subcommittee would find that helpful.

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    Ms. Sanchez. I should also mention before we move on to a 
round of questions that Glenn Tilton, the chairman, president 
and chief executive officer of United Airlines, was invited to 
testify at this hearing today but declined to do so and I think 
that is really a shame because if he were able to be here he 
perhaps would have had testimony that could have been 
enlightening as to the equitable considerations that are 
warranting this hearing on executive compensation.
    It has been suggested that I subpoena him. We try to do all 
things with restraint and voluntarily.
    We are now going to proceed with a round of questions 
subject to the 5-minute rule. I just want to warn the witnesses 
that we each will have limited time, as you did, in which to 
ask questions, so if you could be brief and concise with your 
answers, that would be helpful. It would allow Members time to 
ask the questions that they want to ask of the various panel 
members.
    I will begin the round of questioning starting with Mr. 
Silvers.
    The Office of the United States Trustee is required to 
supervise the administration of Chapter 11 cases and object to 
compensation requests pursuant to section 330 of the Bankruptcy 
Code where appropriate. In your opinion, do you think that the 
United States Trustee could play a more active role in policing 
excessive compensation requests?
    Mr. Silvers. I will give you a very brief answer. Yes.
    I think that this is an example of the sorts of procedural 
protections that Mr. Levin referred to. And I think it is one 
of many areas in which the message throughout our Government in 
recent years has been to indulge inequalities of wealth rather 
than to police them.
    Ms. Sanchez. And if you can, can you please explain for me 
the difference between a retention bonus and incentive pay?
    Mr. Silvers. Well, as a business matter, right, there is a 
notion that a retention bonus is designed to keep you at your 
desk and incentive pay is designed to make you do certain 
things while you are sitting there. I think this is a 
distinction of limited merit, frankly.
    I fully understand, I think the AFL-CIO fully understands, 
that the politics of 2005 in terms of moving legislation 
through, promoted this notion that what we care about is this 
type of pay rather than that type of pay. I think the concern 
here is one of amount, but more importantly the real concerns 
here are not this distinction, which can be completely gamed 
and has been and will be again.
    The real issues are twofold. One is simply the question of 
fairness, of amounts, of what is happening to people. But the 
more important question is the question of what we are 
incentivizing executives to do. The current system is one in 
which if you were sitting at your desk as an executive with a 
company that is not bankrupt and you were thinking about 
bankruptcy as a strategy, as a strategy for reneging on long-
term promises made to long-term employees, you can do so today 
in the relatively certain knowledge that you personally will 
not only not suffer as you will make others suffer, but that 
you will actually profit by doing that. And that is really the 
heart of what we see as the problem here.
    Now, again, we think that the solutions lie more in what 
Mr. Levin was talking about, procedural devices of various 
kinds, than in absolute caps or bars, for the very reason Mr. 
Levin said, which is that absolute caps or bars are an 
impediment to successful reorganizations.
    Ms. Sanchez. Thank you.
    Speaking of Mr. Levin, nice segue, Mr. Levin, you suggested 
that limitations on compensation should be specifically 
targeted against those senior executives who are in a position 
to make self-serving compensation decisions.
    How would you devise a solution to implement that 
suggestion?
    Mr. Levin. Well, as I said, the SEC Rule SK, I think it is 
section 402 of that rule, lists the kinds of executives that we 
would contemplate covering, and those are people like the CEO, 
the executive vice president, COO. They have different titles 
in every company, but they are the executive decision-makers 
that are usually the most highly compensated.
    You very often see in a company, the most highly 
compensated individual is a sales manager because he gets a 
commission on sales or she gets a commission on sales and does 
just a phenomenal job selling the company's product. You don't 
want to limit that person. But that person also has no ability 
to affect his own or her own compensation. The executive, being 
at the top of the pyramid, does, and that is where I think the 
effect should be focused.
    I will complete my answer with that. Thank you.
    Ms. Sanchez. Okay, thank you.
    And I am going to have one further question for you. As one 
of the original drafters of the Bankruptcy Reform Act of 1978, 
was it Congress's intent that Chapter 11 provide a level 
playing field for the various constituencies involved in a 
case? And with respect to labor interests, do you think unions 
still have a level playing field for participating in Chapter 
11 cases?
    Mr. Levin. It was definitely intended that all parties be 
given negotiating tools and levers to be able to sit at the 
bargaining table. Everybody makes sacrifices in a Chapter 11. I 
say everybody. Suppliers who sell goods after Chapter 11 get 
paid in full for the goods they sell. They are not making 
sacrifices. They are benefiting by being able to continue to do 
business. But if you don't pay them, they won't ship. It is 
that easy.
    But generally speaking, everybody is asked to make 
sacrifices, and there is intent to create a level playing field 
and some balance in the bargaining power. It never can be 
completely equal, but you try to create some balance.
    If anybody has a veto and has a right to walk away from the 
table, there is no need to negotiate, because that person can 
dictate terms. And it is hard to say exactly where that balance 
is, and it keeps getting readjusted every few years, and we 
hope Congress will continue to maintain that balance, because 
that is what drives consensual and therefore successful 
reorganizations.
    Ms. Sanchez. Thank you, Mr. Levin.
    I would now like to recognize the Ranking Member of the 
Subcommittee, Mr. Cannon, for 5 minutes of questions.
    Mr. Cannon. Thank you, Madam Chairman.
    Congressman Keller has asked me to ask unanimous consent to 
submit for the record the proxy statement with a cover letter 
from Mark Anderson, who is, I think, the vice president for 
governmental affairs of United Airlines.
    Ms. Sanchez. Without objection, so ordered.
    [Note: The information referred to is not reprinted here 
but a copy has been retained in the official Committee hearing 
record.]
    Mr. Cannon. I would like to thank you for this panel. This 
is a very thoughtful panel, and we appreciate the input on both 
sides of the aisle.
    This is an initiative that Mr. Delahunt and I worked on in 
the past and one that we need to focus us on. I always find it 
interesting when Mr. Conyers and I are on the same panel. We 
often agree, which may surprise some folks, but interestingly, 
when you are philosophically clear it is a lot easier to agree, 
because then you can actually talk about what can be done as 
opposed to posturing.
    And so I want to just thank Mr. Conyers for his kind words 
and for the fact that we are able to be here today and looking 
at some of the things that we can actually do about, what is 
problematic, and it is problematic for reasons that you have 
all said.
    I think after hearing the panel and some of the questions 
that the Chairwlady has asked, there is actually some consensus 
on this. And after Mr. Levin's response and Mr. Silvers, your 
response, it seems to me that there is some consensus that if 
we have procedures, then the parties will be able to negotiate 
and solve problems as opposed to having rigid tests or other 
mandates.
    Is that a fair conclusion, Mr. Silvers?
    Mr. Silvers. Yes, I think that is. I think that what our 
position is is that caps, for example, on pay here, is not 
probably a wise way to proceed. And that the distinction 
between incentive pay and retention pay has proven to be one 
that can be gamed.
    Mr. Cannon. Right.
    Mr. Silvers. And so I think we agree there. I am not sure 
we agree on what the procedures should be, but----
    Mr. Cannon. Right, but the point is that at least we want 
to have some flexibility there and that a process is going to 
produce a better result than a rigid conclusion.
    Let me just say, Mr. Levin, I really appreciate your long 
history of work in this very difficult broader area and in this 
particular area as well.
    But, you know, I travel from here to Utah. I have lots and 
lots of air miles. And I spend a lot of time talking to 
stewardesses about this problem, mostly with Delta, but as you 
spoke this morning, Ms. Muoneke, it occurred to me that I would 
be interested in knowing whether you would prefer, 
retrospectively, to have had instead of a defined benefit 
pension plan a defined contribution plan. Have you thought much 
about that?
    Ms. Muoneke. I think personally, and in talking to my 
fellow flying partners, that we would like to have a matching 
plan. It would be in our best interest.
    We did have one previously, but that was nullified by 
United earlier in my career. I think the difference is that my 
401(k) wasn't a plan that I had from the very beginning of my 
career. This is something that was offered to us as a 
supplement to our defined benefit pension plan that we all 
thought we were going to have when we retired.
    If I had the choice and had known a number of years ago 
that I was going to have to rely solely on my 401(k), I would 
have planned my retirement differently. I would have tried to 
maximize my funding into my 401(k) instead of now playing catch 
up, which is very difficult to do.
    Mr. Cannon. Right. The problem here, and I feel very 
sensitive asking you the question, because you are not back at 
the beginning and you are stuck where you are right now.
    In particular, you said that your hours were up 40 percent 
and your pay is off $5,000. Is that $5,000 for the whole amount 
of the extra time you are working, or is your net pay, 
regardless of how many hours, less than what you were making 
before?
    Ms. Muoneke. To understand how our hours are, it is not as 
in the general public. I, prior to 9/11 occuring, I was flying 
75 hours a month. Now, 75 hours a month does not include my 
total time away from home. That is just actual in-air flying 
hours.
    Now I am flying 100-plus hours per month, so that is quite 
more hours per month that I have to fly, just to try to keep 
myself on track to where I was prior to losing my pay and my 
pension. But with my hours being up to what it is now, that 
means that I am away from home a lot more. I don't have the 
time to spend with my daughter. I have to rely on outside help 
to get here to different places that I need her to go.
    So it is just a difficult situation, not only for myself 
but my colleagues. We are all facing the same crisis.
    Mr. Cannon. Thank you. I appreciate your willingness to be 
here today.
    I see that my time has expired, Madam Chairman. I yield 
back.
    Ms. Sanchez. Thank you, Mr. Cannon.
    Now it gives me great pleasure to recognize Mr. Conyers for 
5 minutes.
    Mr. Conyers. Thank you, Madam Chair.
    I want to suggest to the Subommittee that I am trying to 
examine the ways that we lift up all of the problems of the 
witness that has testified here in her individual capacity. The 
fact of the matter is there are hundreds of thousands of people 
in her condition, and we need to get a record on this, whether 
it is from the lawyers that represent them, the consumer 
groups, additional groups coming in, but this story has to be a 
part of the record, not necessarily the record of the 
Subommittee but a record somewhere where we can repair to this.
    We are not going to lift up one person's testimony and say 
oh, that is really bad. There are lots of people out there that 
are in that position, and I would like to invite Chris Cannon 
and some of us to examine ways in which we can compile these 
records.
    The second thing, I wanted to extent my sympathies to Mr. 
Wintner, whose plea for considering the poor executive who is 
about to lose some compensation, may even lose his job, gosh. 
Millions of people are being downsized, thrown out of work, 
kicked around all over the place, and we have the 
responsibility, you do, to come to us and tell us, but wait a 
minute, we don't want you guys to go too far in the Congress, 
but you have got to think about, this may worsen the plight of 
the corporation.
    Never once do you tell us about the incompetent executives 
that brought the company to that position in the first place. 
What do you do about them? Well, nothing. They frequently 
benefit from their own inability to govern correctly.
    And so I just want you to know that I am sympathetic about 
executives. Man, let us be fair here. We haven't talked about 
the difference between Government trustees and private 
trustees, because the Government trustees at the Department of 
Justice should sooner or later be a witness here, and I am 
hoping that they do. I am getting it from a lot of judges and 
private trustees, that they are all saying that the system is 
tying the hands of the judges and they don't have any choice.
    I don't know what is happening here at this hearing. I know 
what I am hearing and being told and I know we are gong to have 
some more hearings about this so that we can get to this 
problem, but are the judges' hands tied? Something has got to 
go on the record today.
    Now, if we have to take Mr. Silvers' warning, that we are 
going to get gamed again if we are not careful, I mean we will 
abolish the distinction and we will do some great 
legislatively-sounding great things, but it won't change the 
practices and procedures that have emanated from that 2005 
changes of the 1978 Bankruptcy Code. Much of that has gone out 
of the window. We have got means tests now for consumers trying 
to go into bankruptcy. We have got single parents, and here is 
one, trying to raise a family by themselves, and they may end 
up in a personal bankruptcy of their own. Forget the companies 
and these executives.
    So I see a great challenge and opportunity. That is why I 
am so proud of this Subcommittee on the Judiciary. We are going 
to take this thing apart, issue by issue, and organization by 
organization.
    And now I would like Mr. Wintner to join with me in the 
sympathy for the other people that could be harmed in this 
process.
    [BUZZER]
    Mr. Conyers. Go ahead.
    Ms. Sanchez. I am going to request unanimous consent that 
the gentleman be given 1 additional minute of time so that the 
witness may respond.
    Mr. Wintner. Yes, thank you Congressman Conyers and Madam 
Chairman.
    I actually represent various parties to Chapter 11s, in 
some cases debtors, in some cases creditors committees, in some 
cases individual creditors, in some cases ad hoc bond holders, 
and many other parties. Almost never, at least in a Chapter 11, 
do I represent the management in their capacity as management.
    My creditor clients, and I am not speaking for anybody here 
but myself, but obviously it is based on my experience, they 
have no desire to overpay management. It is coming out of their 
recovery. Their only interest in terms of retaining or 
attracting management is simply one of self interest.
    Mr. Conyers. I know you are not kidding me, are you?
    Mr. Wintner. About which part?
    Mr. Conyers. About the part that they have--here we have 
examples before you of incredible, unjustifiable excesses, and 
the next thing you tell me after we have taken 5 minutes on 
this is to say they have no interest in giving undue 
compensation to the top executives.
    Mr. Wintner. They do not. And in fact, I would support the 
position stated by the other panelists as well as Members of 
the Subcommittee, that any procedural improvements which give 
all parties to the Chapter 11 a say in that executive 
compensation----
    Mr. Conyers. But what about the incompetent ones?
    Ms. Sanchez. The time of the gentleman has expired.
    If you would like, we can do a second round of questioning 
in which you will be allowed to continue with your question, 
Mr. Conyers.
    At this time, I would like to recognize Mr. Franks for 5 
minutes of questions.
    Mr. Franks. Well, thank you, Madam Chair. And it is always 
interesting to come to the Committee.
    Madam Chair, it appears to me that the challenge here 
sometimes is more basic than some of our examination here might 
indicate.
    When we try to place at odds the executive of a company 
with the employees of a company, sometimes it becomes--we are 
focusing the entire effort, I think, on the wrong question. If 
our only concern were the employees of a company, if that were 
our only concern, and a company was having a challenge 
economically, would it not be in the company's best interest to 
try to use whatever market mechanisms necessary to bring in the 
very best possibility of preventing that company from failing 
entirely and being a complete loss, both economically, in terms 
of the job, and the potential benefits for retirement to those 
employees?
    And I know that the challenge here for the courts and for 
us is to be able to separate that process, of trying to incent 
the greatest leadership for a company and what those 
compensation packages should look like, and those who would 
deliberately game the system and, like Mr. Silvers said, try 
to--that they would be literally incented to try to hurt the 
company and lead it into bankruptcy for some of their own 
financial reasons. That seems to be the challenge for me.
    So I guess, Mr. Levin, if I could start with you, what are 
your key criticisms of the KERP's provisions? And if you could 
outline for us how the court's struggle with this dynamic. You 
know, they are trying to maintain a market-driven system here. 
I mean, the Soviets didn't have that. Everybody got paid the 
same, and it didn't work too well. So they want to try to 
maintain the market system here, and yet they want to keep 
people from gaming the system. How do they come up with that 
balance?
    Mr. Levin. How do the courts come up with that balance?
    Mr. Franks. What issues do you think are the key ones that 
the courts struggle with?
    Mr. Levin. I think what we have seen in the practice under 
section 503(c) since it was enacted is that where there is 
broad agreement among the constituencies in the case, on what 
the executive compensation should be, the courts generally 
approve the agreement. And when there is not agreement, the 
courts generally do not.
    There is nothing in the law that says that is how it is 
supposed to work, but on the ground, I think if you look at the 
background report that the National Bankruptcy Conference 
submitted with our testimony here, I think you can trace 
through those cases and see that that is in fact what happens.
    And I think that is consistent with the level playing 
field, Chapter-11-is-an-invitation-to-a-negotiation concept 
that Congress built into the process 30 years ago. I think that 
is what is going on.
    In terms of the actual problems, one of the problems that I 
mention is that 503(c) sweeps too broadly. It sweeps too far 
down into the organization with key performers, important 
people, as I mentioned, people such as Mr. Allen, that Mr. 
Silvers mentioned, where there are no abuses, there have been 
no abuses. And that would be one change that we recommend.
    And the other is to impose the procedures and the measured 
process that allows people to get to the negotiating table and 
get agreements.
    Mr. Franks. Well, Mr. Levin, let me try to expand on that 
just a little.
    Just a hypothetical situation. If you have got a company, a 
large, say, airline company, that has through incompetent 
leadership come to the point where they are in dire trouble, 
and you are only concerned about maintaining the company for 
the sake of the employees, what impediments are reasonable to 
say to that company, well, there are only a few people out 
there that can turn this around, and that is a highly 
competitive market out there for these people, but we are going 
to say to you that you can't hire them except under these 
conditions.
    What impediments are reasonable? Shouldn't we pull out all 
stops to save the company?
    Mr. Levin. Again, as I said earlier, pulling out all stops 
runs the risk of allowing one constituency to dictate the 
outcome. The other constituencies who participate in the 
negotiation process understand what you just said, that you 
need good people to try to save the business. And that you 
don't attract new management, assuming you had bad management, 
you want new management, you don't attract new management by 
paying way under-market.
    So there is a balance. We hope that by attracting new 
people it will increase the overall value of the company and, 
therefore, diminish the pain that has to be shared among the 
various constituencies. But I don't think you can do that with 
a one-size-fits-all rule. It has got to be people understanding 
what their interests are, whether it is creditors or employees, 
understanding that new people, new management, can improve the 
situation, and that ought to be pursued without excess.
    But define excess. It is, ``how high is the sky?'' You 
can't define excess in general. It has to be case specific.
    Mr. Franks. Thank you, Mr. Levin.
    Thank you, Madam Chair.
    Ms. Sanchez. The time of the gentleman has expired. Thank 
you.
    I would like to recognize at this time Mr. Johnson for 5 
minutes.
    Mr. Johnson. Thank you, Madam Chair.
    Now, no doubt that there have been numerous documented 
instances of corporations that have been mismanaged by high 
paid, excessively, obscenely paid, executives, and then that 
corporation may find itself in bankruptcy, where the issue 
becomes whether or not there will be a liquidation or whether 
or not there will be a reorganization.
    And, of course, when there is a liquidation, it means there 
is a cessation of the operations of the business, the creditors 
lose, the workers los, anybody who has ongoing relationships 
with the business loses. And then if there is a reorganization 
proposed, then there is a chance for the business to remain 
viable and perhaps be able to pay back either all or a 
percentage of its creditors and, of course, be able to pay its 
employees as it continues to operate.
    Certainly a reorganization is probably better for all 
concerned, including the workers, than a liquidation. And in 
the case of a reorganization, then the issue becomes how much 
do you pay the executives to run the company and try to get it 
out of Chapter 11 and back to viability. And so executive 
compensation, how much do we pay the executives to lead the 
company out of bankruptcy, and I believe that that is one of 
the issues that we are here to address today.
    And I have heard some comments, that we should have some 
limitations on compensation, and I have also heard that caps 
are not a solution. So if I could hear from each one of you as 
to your opinion about limitations on compensation, does 
everybody agree that there should be limitations on 
compensation during a reorganization? If so, what does the--
what impact does that have in terms of the business's position 
in the overall marketplace?
    And, number two, if you should have limitations on 
compensation, how can that be accomplished?
    Mr. Silvers?
    Mr. Silvers. The AFL-CIO would like two specific things 
done in this area as part of the broader examination that Madam 
Chairwoman described as an effort to restore balance as a whole 
to the bankruptcy system.
    The two specific things we would like are, one, the 
extension of broader review powers over executive comp from the 
KERP area, where we only look closely at retention, to look at 
the package as a whole, because of this issue of judges feeling 
like their hands are tied.
    Secondly, we want executives who are contemplating making 
war on their employees, doing to people what was done to Ms. 
Muoneke, we want them before bankruptcy to realize that if they 
do so, what they do to others will happen to them. And that is 
the second principal we want embodied in law, and it is not a 
principal about how do you review comp after the fact, it is 
about what you have to think about beforehand when you are 
thinking about hurting other people in the way that hundreds of 
thousands of American workers have been hurt in this process.
    Mr. Johnson. Okay. Do unto others as you would have them do 
unto you, perhaps, as a system of imposing that.
    Mr. Silvers. Pretty much.
    Mr. Johnson. Let me ask, Mr. Levin, your position, and then 
Mr. Wintner, and then if you have got anything that you would 
like to say on that, Ms. Muoneke.
    Mr. Levin. The National Bankruptcy Conference I think would 
not favor any limits on compensation per se. They are too hard 
to define. One-size-fits-all does not work.
    I think our focus is more on making sure that executives 
are not in a position to line their own pockets, that the 
process prevents that, through the negotiation process and 
court supervision, imposing reasonableness standards.
    You can't define what is reasonable in any particular case 
without understanding the facts.
    Mr. Johnson. Does the law enable that process to take place 
right now or do we need some revisions of the law?
    Mr. Levin. I think revisions would be appropriate. I think, 
as I noted----
    Mr. Johnson. To give the judges more authority to gauge 
exactly how?
    Mr. Levin. Well, right now the law permits incentive plans 
under a very broad standard and it effectively prohibits 
retention plans. And we think those could be brought more into 
balance.
    Incentive plans are useful because if they work, people 
actually perform.
    Mr. Johnson. All right.
    Ms. Sanchez. The time of the gentleman has expired.
    I would now like to recognize Mr. Cohen for 5 minutes.
    Mr. Cohen. Thank you, Madam Chair.
    Before I start, I would like to yield as much time as he 
desires and needs to the honorable Chairman of this Judiciary 
Committee, Mr. Conyers.
    Mr. Conyers. Well, that is very kind of you, Mr. Cohen.
    Mr. Levin, would you share my concerns, please, because all 
this emphasis on negotiation sounds very fair. Well, guess 
what? The corporations have a huge advantage sitting across 
from the union representatives because they will say, ``Look, 
guys, if you don't go along, guess what? We are going to 
liquidate.'' And that is what they are doing now and that is 
what they will be doing after all this talk about fair 
negotiations is over with.
    And I thank my colleague for yielding.
    Mr. Cohen. Thank you, sir.
    Mr. Levin, is there a system right now where if something 
shocks the conscience of the court, the court is supposed to 
act?
    Mr. Levin. Yes. The court has the unquestioned authority to 
disapprove a transaction that is completely outside the bounds 
of reasonableness. I think the standard that would--I am having 
trouble coming up with the exact standard that the courts use, 
but certainly shock the conscience would get there.
    Mr. Cohen. How often does that occur? What percentage of 
cases, do you think?
    Mr. Levin. Well, since most of the cases where the court 
approves things--we are talking the executive comp area or are 
we talking more generally?
    Mr. Cohen. Executive comp.
    Mr. Levin. Okay. In the cases where the courts have 
approved things since the enactment of 503(c), there has been 
general agreement among the parties in the case, and so we 
haven't seen a situation where the court has approved something 
that one might say shocks the conscience, because there maybe 
disagreement about how reasonable it is, but it is not up to 
that standard and there is, as I said, objections and the comp 
plans have been withdrawn and the courts have approved.
    The courts have disapproved where there has not been 
consensus, even on matters that don't quite shock the 
conscience but just are outside some bounds of reasonableness.
    Mr. Cohen. Mr. Silvers, you brought to our attention Mr. 
Cooper and his turnaround for Enron, and I hate to say it, I 
guess in this room I talked about having some stock in one of 
those companies that kind of went south on the radio, I guess 
it was Sirius, and I had Enron too, so I am not real thrilled 
about his $100 million or whatever.
    Did anybody object to his compensation?
    Mr. Silvers. Yes, in fact this is one instance where the 
U.S. Trustee objected to the final $25 million, it got cut in 
half, so it ended up being a final bonus of $12 million in the 
Enron case. But right at the margin, right.
    And let me extend my condolences on behalf of the 10 
million AFL-CIO members, pretty much every one of whom in some 
fashion or another also owned Enron.
    Mr. Cohen. What was Mr. Silvers' hourly compensation--Mr. 
Cooper's, I am sorry.
    Mr. Silvers. Well, it is hard to say. He came in, and I 
think, because we don't actually know actually what he 
individually got out of this--he came in in December of 2001 
and he was there, I think they were still doing it, it was in--
it took several years. I forget the--it was 2 or 3 years.
    If you figure he worked a hard couple of years, that he was 
at work, oh, maybe twice as much as most of us are, so 10,000 
hours a year--no, that is 4,000 hours a year, say 3 years, that 
is 12,000 hours. You are talking about a very large number. 
$100 million divided--$10,000 an hour I think it comes out to.
    Mr. Cohen. But did he bill an hourly rate or did he just 
bill a gross rate for his services?
    Mr. Silvers. Again, I think this is--let me edit what I 
just said. That is for the firm. We don't know--I couldn't tell 
you how many people, I am sure it is in the court record, were 
compensated as a result of that $120 million.
    What we do know is that following this engagement, Mr. 
Cooper, who by the way, I don't mean to suggest he is a bad man 
or a crook or anything like that. He was a businessman, he went 
and did the job, he got paid. But he got paid an enormous 
amount of money, and the measure we have of that is that he was 
able to, in the most expensive real estate market perhaps in 
the world, he was able to buy one of the most expensive 
properties. And I think that tells us something about sort of 
what the pay out was at the end.
    Ms. Sanchez. The time of the gentleman has expired.
    I am going to enquire of the members who are still present 
if there is interest in a second round of questioning. I know I 
have a couple more questions I would like to ask, if anybody 
else is interested in asking questions? If not, I will just ask 
unanimous consent to--I would like unanimous consent for 3 
additional minutes to ask questions.
    Without objection, so ordered.
    Mrs. Muoneke, can you tell us some of the concessions that 
the employees were forced to make as a result of going into the 
Chapter 11 bankruptcy? Some of the things that you guys gave 
up?
    Ms. Muoneke. The bulk of our concessions, other than 
pension, was work rules. Work rules is, like they govern our 
job at United, and we have had to give up quite a bit with 
that, which means we are working longer hours, our job 
responsibilities have increased two-fold, but we are paid less 
than what we were paid prior, but we are expected to do twice 
the amount of what we were initially--what our job description 
had initially set out for.
    And job rules may not be a major thing to you, but for us, 
it is everything for us.
    Ms. Sanchez. I am sure it governs childcare and numerous 
other issues.
    Mr. Levin, I am interested, and I think Mr. Conyers made an 
excellent point about feeling sorry for the poor, beleaguered 
executive when we hear testimony about what the real rank and 
file worker gives up when they are making sacrifices for the 
company and the sacrifice doesn't seem to be equaled by those 
at the top, who always seem to be taken care of in one respect 
or the other.
    I am interested to ask, Mr. Levin, do you think an airline 
can continue to exist without dedicated rank and file employees 
who do the day-to-day of the airline?
    Mr. Levin. As Mr. Cannon said earlier, I too fly quite a 
lot, and I rely very heavily on those dedicated employees who 
are good at their jobs and careful in protecting our safety and 
our comfort while we are en route. They are critical.
    Ms. Sanchez. Would it be safe to say that in the Chapter 
11, yes, there is concern that you want to keep good management 
around, but shouldn't there also be an equal concern that you 
keep good employees around who will continue to make the 
business a going concern?
    Mr. Levin. There is no question about that. I don't want to 
frame this, though, as a zero sum game.
    Ms. Sanchez. I understand that. I think everybody was 
interested in making sure that the airline continued in 
business, because if not the rank and file sure don't get paid, 
nor do the executives. Although it seems to me that the way 
things are structured, which we have an inordinate amount of 
concern for keeping good management, but we don't have that 
same and equal concern about keeping good rank and file 
employees.
    I mean, correct me if I am wrong, but usually in 
restructuring or in bankruptcy, one of the things that they 
tend to do is slash jobs and then give bonuses to executives 
because they are making the company leaner. I mean, who is 
bearing the bulk of the sacrifice in that scenario?
    Mr. Levin. You are right. It is a very difficult question. 
We want to protect jobs. That is what Chapter 11 is about.
    Companies sometimes over-expand, and the only way you can 
get them healthy again is by cutting them back. You can't cut a 
company back by keeping all of its suppliers, all of its 
workers, all of its other obligations, in an overexpansion 
situation. That is got to be done in the most humane and 
constructive way possible, in a way that is going to preserve 
the best value of the company for the stakeholders there.
    I don't question that at all, that that is an important 
consideration in Chapter 11. But to try to preserve a company 
as it is when it went in, if it were healthy enough to do that, 
it wouldn't have needed to go into bankruptcy.
    So it is difficult to sit here and dictate a balance that 
makes that work. All of those factors must be taken into 
consideration.
    We are not arguing that there is any particular sympathy 
for the executives.
    Ms. Sanchez. I understand that.
    Mr. Levin. What we are simply saying, is like I mentioned 
earlier, the suppliers, if you tell suppliers that are shipping 
fuel to the airline, sorry, we are only gong to pay you 50 
percent of the market price of the fuel, they will go sell 
elsewhere. And we want to keep the employees, but we don't want 
management to say--maybe in an industry like airlines there 
aren't other jobs and you don't need to worry about keeping 
them in a very--in an area where there is a very competitive 
labor market at the executive level.
    It is not a question of concern for the executives. It is a 
concern to fill those jobs rather than having employ slots.
    Ms. Sanchez. I understand that. I am just simply trying to 
point out the fact that there seems to be an inordinate amount 
of time and attention that is focused on preserving jobs or 
preserving executive positions, and less so on the rank and 
file members who can be let go summarily and, you know, who 
have already made concessions with respect to pension benefits 
or health care benefits or even wage or hour benefits. And you 
know, they are let go and nobody really cries, for them in the 
end. At least we are not looking to retain--we are not so 
focused on retaining those employees.
    It seems to me that there is an imbalance in terms of how 
the value of each of their work is viewed.
    Mr. Conyers. Madam Chairman?
    Mr. Levin. I didn't mean to suggest that at all, Madam 
Chair. So if I did, I apologize.
    Ms. Sanchez. I understand.
    Yes?
    Mr. Conyers. Madam Chairman, would you yield for just a 
momentary observation?
    Ms. Sanchez. My time has expired, but I will unanimously 
recognize you for 1 minute, Mr. Chairman.
    Mr. Conyers. All right, thank you.
    You know, gentlemen and lady, you know what bothers me, 
frankly? When you lay off a multi-millionaire and you lay off 
somebody making $40,000 a year, there is one hell of a 
difference. A person, an executive who loses his job, the worst 
thing that can happen to him, he is already wealthy. He is 
already in the top 1 percent, over $100,000 a year.
    So to even pretend that losing an executive's job is the 
same as Ms. Muoneke losing her job doesn't even compute.
    Ms. Sanchez. Thank you, Mr. Conyers.
    I am also going to ask unanimous consent to include in the 
record additional statements by Patricia Friend, who is the 
international president of the Association of Flight 
Attendants.
    Without objection, it is so ordered.
    [The prepared statement of Ms. Friend can be found in the 
Appendix.]
    Ms. Sanchez. There being no more questions, we would like 
to thank all the witnesses again for their testimony today.
    Without objection, Members will have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses and ask that you answer in as prompt a manner 
as you can, and those responses will also be made part of the 
record.
    Without objection, the record will remain open for 5 
legislative days for the submission of any additional material.
    Again, I want to thank everybody for their time and 
patience at this hearing of the Subcommittee.
    This hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 12:01 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Stephen I. Cohen, a Representative 
                in Congress from the State of Tennessee
    I am interested in hearing from the witnesses regarding whether 
Congress needs to take legislative measures to address the practice of 
Chapter 11 debtors using sometimes-exorbitant ``incentive'' packages 
for their executives, particularly when those same debtors impose 
enormous financial hardships on their employees in the name of 
achieving a financial recovery. Congress has already addressed its 
concern regarding high executive compensation given by Chapter 11 
debtors to their executives as retention compensation. It may be time 
to take a similar approach with respect to incentive-based 
compensation.
     News Release concerning American Airlines Flight Attendants' 
                           Nationwide Protest
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Submission entitled ``2003 Sacrifices from AA Flight Attendants 
                       Restructuring Agreement''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Submission entitled ``American Airlines Flight Attendant Facts''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 Submission entitled ``APFA FACTS On American Airlines Executive Bonus 
                       vs Employee Concessions''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

  Prepared Statement of Patricia A. Friend, International President, 
             Association of Flight Attendants--CWA, AFL-CIO
    Chairman Sanchez and members of the subcommittee, thank you for 
holding this timely hearing and exposing a troubling trend that 
threatens to erode the great American middle class and damage workers 
confidence in our economic system.
    My name is Patricia A. Friend and I am the International President 
of the Association of Flight Attendants--CWA (AFA-CWA), AFL-CIO. AFA-
CWA represents over 55,000 flight attendants at 20 different airlines 
throughout the United States and is the world's largest flight 
attendant union.
    When companies enter bankruptcy, employees are the first to suffer 
the consequences as management demands drastic pay and benefit 
reductions. To add insult to injury, management then shops for 
potential investors, using their employees reduced standard of living 
as a selling point in hopes of exiting bankruptcy with large sums of 
fresh capital. Employees then scrimp to get by as management gouges on 
new investments and rewards themselves outrageous bonuses.
    Can you see why employees feel exploited?
    Can you imagine the anger and outrage that working Americans feel 
when their sacrifices bankroll bonuses and higher standards of living 
for a few executives.
    Corporate executive compensation in the United States is off the 
charts, but in the airline industry, the abuse is at its worst. In 
2005, American executives paid themselves at a rate more than 400 times 
that paid to rank-and-file employees--a disparity in wages not seen 
since the 1920s--and, in 2006, the median CEO compensation increased 48 
percent to $30.2 million Nowhere is the injustice of the great wage 
divide more palpable than in the executive suites of our nation's 
airlines.
    Since congress passed the Airline Deregulation Act of 1978, one-
hundred-sixty (160) carriers have filed for bankruptcy and aviation 
workers have for too long paid the price for mismanagement. The lessons 
should have been clear from this tragic track record, yet congress and 
our judicial system have ignored the best interests of American workers 
and have been complicit in allowing executives the use of our 
bankruptcy system to enrich themselves at the cost of their employees.
    Recent examples highlight why congress should take immediate action 
to address this great injustice.
    The moment United Airlines emerged from bankruptcy, company 
managers raided its coffers. Far exceeding even the median money grab, 
United Airlines CEO Glenn Tilton took $39.7 million in 2006 
compensation. This, after cutting its work force by 25 percent, dumping 
its workers' under funded pensions and extracting profound sacrifices 
from its employees during its three years in bankruptcy.
    Incredibly, Mr. Tilton's compensation package was greater than the 
entire profit at United Airlines for 2006. This case alone should 
compel you to act. Sadly however, there is fresh and ample evidence of 
excessive greed in airlines executive suites.
    At Northwest Airlines, management recently disclosed a plan to exit 
bankruptcy that would reward its top 400 executives with an average of 
$1 million each and give nothing back to flight attendants whose wages, 
benefits and working conditions have been decimated in bankruptcy. Last 
year, after flight attendants at US Airways endured massive pay cuts 
over several years, the airline's executives rewarded themselves 
multiple million in stock bonuses and double-digit pay increases. 
Employees at American Airlines have not been compensated for the $1.6 
billion in concessions they gave in 2003 to keep their airline out of 
bankruptcy, while AMR CEO Gerard Arpey took more than $7.5 million in a 
stock award for 2006.
    Congress must take action to rein in management's use of our 
bankruptcy system to raid the coffers of American companies, some of 
whom were built by generations of hard working employees. Our judicial 
system is complicit in this growing greed. Our courts have largely 
ignored the pleadings of employees in bankruptcy cases providing no 
protection for those most vulnerable when a company reorganizes.
    Can any of us remember the last time a bankruptcy court rejected a 
compensation package for management?
    Irresponsible management of our nation's airlines has been taken to 
an extreme. As if in a winner-take-all game of Monopoly, airline 
executives seem to be on an unstoppable trajectory, with greed as the 
only rule of the game. Your efforts to put an end to excessive 
compensation and to rectify bankruptcy laws will serve the greater 
interests of all working people who depend on a healthy and just 
economy.

                                 
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