Creditors Say Hostess Pay Is Questionable
The committee representing Hostess's unsecured creditors alleges that information it has gathered suggests "the possibility" that the company converted a chunk of its top executives' pay from performance-based bonuses to salary, "at least in part to sidestep" rules designed to ensure that companies in bankruptcy aren't enticing their employees to stay on board with the promise of cash, according to documents filed with the U.S. Bankruptcy Court in White Plains, N.Y.
Some creditors question Hostess pay raises approved in late July.
Salary Increases at Hostess
Brian Driscoll, CEO, around $750,000 to $2,550,000
Gary Wandschneider, EVP, $500,000 to $900,000
John Stewart, EVP, $400,000 to $700,000
David Loeser, EVP, $375,000 to $656,256
Kent Magill, EVP, $375,000 to $656,256
Richard Seban, EVP, $375,000 to $656,256
John Akeson, SVP, $300,000 to $480,000
Steven Birgfeld, SVP, $240,000 to $360,000
Martha Ross, SVP, $240,000 to $360,000
Rob Kissick, SVP, $182,000 to $273,008
NOTE: Some executives didn't take full raise.
Source: Creditors' Committee court filings
Federal law severely restricts "retention" bonuses that reward executives for sticking with distressed companies. Companies now often craft "incentive" plans that pay executives for hitting specific performance targets to avoid running afoul of the law.
The creditors said Hostess continues to pay the pre-bankruptcy salary increases, which aren't "contingent upon any aspect of the debtors' business performance or operations."
Last July, the court documents said, the compensation committee of Hostess's board approved an increase in then-chief executive Brian Driscoll's salary from to $2.55 million from around $750,000. The company had hired restructuring lawyers in March 2011, the creditors said, and filed for bankruptcy protection on Jan. 11.
Mr. Driscoll is no longer with the company and wasn't reached for comment.
Some details of the court documents that were redacted were made visible when the papers were saved to a word-processing program.
According to the creditors' court papers, lawyers for Hostess maintain that modifications to compensation before a filing aren't subject to the bankruptcy provision regarding incentive compensation.
A spokesman for Hostess said Wednesday the company doesn't believe the creditors' "theory has any basis in law." He said the executives' salaries were increased at a routine compensation review "to align them with industry standards and because the executives were being asked to take on significant additional responsibilities associated with trying to restructure the company outside of bankruptcy proceedings."
"Nevertheless, we are working cooperatively with the committee to address their concerns and expect to resolve this amicably," he said.
The creditors said in the court papers that testimony from Hostess's executive vice president of human resources indicates that before the bankruptcy filing, Hostess was working to shift its compensation structure. Hostess eliminated bonuses payable only if certain performance goals were met and, on July 26, the company's compensation committee signed off on "substantial salary increases for numerous senior executives," the creditors said.
Besides Mr. Driscoll, "other executives' salaries were increased by from 35% to 80%," the creditors said. The documents said that Mr. Driscoll subsequently renounced a portion of the increase while "other executives did not appear to have done so." Besides Mr. Driscoll, two other executives who saw their salaries increase have also left the company, according to the spokesman.
The court papers also cited the report of a Hostess compensation consultant saying that after a bankruptcy filing the company should tie payments to company performance and wrap them into an incentive plan.
Hostess "disregarded" the suggestion, the creditors said, and also failed to disclose the modifications. The creditors learned of the changes during a February deposition of the human resources executive.
At that point, the creditors said, they sought more information about the compensation questions but Hostess "refused to cooperate."
The creditors are now seeking access to documents regarding the compensation changes, minutes of board meetings and the compensation committee and documents from an outside compensation consultant.
Hostess's Chapter 11 case has been stalled for the last several weeks as the company and its unions continue to negotiate behind closed doors and both sides prepare for an April 17 trial over the company's request to shed its collective bargaining agreements in bankruptcy.
On Tuesday, the company filed a request for more time to propose a bankruptcy-exit plan, saying it couldn't move forward with a proposal until it makes headway regarding labor issues and an initiative to secure new capital. The company said it has launched a "parallel process" to pursue a sale of its assets "as a failsafe," should Hostess not obtain the changes it wants to its union deals.
