(Mis)performance bonus: Secret millions in bonuses to Norwegian executives spark condemnation

NT_columnist_JonathanPhoto: Gorm Kallestad / NTB / Norway Today
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Little more than a year after securing government support, when it was on the brink of bankruptcy, Norwegian Air Shuttle is in potential trouble after controversially paying some of its top management millions of kroner in bonuses. The outgoing CEO, Jacob Schram, who was recently fired, received a huge bonus despite the fact that during his tenure the company filed for bankruptcy protection, made huge staff layoffs, and drastically restructured and reduced its operations. With growing public criticism, are these bonuses not only financially unwise but also highly unethical?

Norwegian was in trouble even before COVID-era

The past few years have been, to put it mildly, slightly troubling for Norwegian Air Shuttle. Norwegian was already in a precarious financial position when CEO Jacob Schram took over in January 2020. The termination of his contract, on June 20, signaled a period where the company spiraled out of control due to the economic effects of restricted travel, closed borders, and lockdowns worldwide.

The past few years saw Norwegian aggressively expand operations overseas, saddling the company with USD 8 billion in debt (and a deficit of close to NOK 1.7 billion for the 2019 financial year) just before the arrival of the COVID-19 pandemic. Schram’s first major challenge was to try and help the airline through a pandemic that not only grounded entire fleets of aircraft but also crippled the airline and travel industries. However, with company finances precarious it was always going to be a huge challenge for Schram, and the Norwegian board, to try and turn things around.

Schram’s tenure ended on June 20, 2021, when the board voted to terminate his contract with immediate effect. Chief Financial Officer, Geir Karlsen, has been appointed as the new CEO. Schram, however, does not leave empty-handed. It has emerged that he, and Karlsen, have secured, together, some NOK 22 million out of the NOK 30 million paid to top management in secret bonuses.

Schram told to scram after just 18 months, flies off with golden parachute

The company barely stayed afloat during 2020 mainly thanks to a combination of public and private investment. Norwegian took up the offer of the government’s COVID-relief package, for the airline industry, in the form of a guaranteed loan. According to Forbes, some 90% of this aid package, USD 220 million, came with conditions ranging from a ban on the payment of executive bonuses (until May 26, 2021) to a restructure of the company’s operations (no more long haul flights). Furthermore, a debt-to-equity swap was the cornerstone of the NOK 12.7 billion financial restructuring of the company.

Schram also secured Norwegian’s long-term future (and, perhaps, his legacy) thanks to investment from the Chinese Government. BOC Aviation, controlled by the investment section of the Bank of China, took a 12.67% stake in the company, last May, to essentially save the company. However, he essentially put the company on “hibernation mode” for the remainder of 2020 and into this year.

It was during Schram’s tenure that Norwegian encountered a public relations nightmare. Images of staff protesting outside the Norwegian parliament arose due to the economic impact of COVID-19. A pre-pandemic workforce of 10.000 was scythed down to, at one point in 2020, only 600. Though operations are tentatively expanding again, four of its staffing agencies have filed for bankruptcy in Denmark and Sweden.

Schram leaves, however abruptly his position was terminated, with a “golden parachute” and full salary until March 30, 2022. He does, however, leave a company that under his watch now has a significant Chinese government investment, a drastically reduced flight network, staff levels and is still in a financially precarious position. Karlsen has much work to do.

Jacob Schram - Geir Karlsen
Photo: Stian Lysberg Solum / NTB

Secret bonuses sparks political condemnation

When the details of the secret bonuses were leaked there was widespread condemnation from without and within the company. Due to the sudden termination of Schram’s contract, it appears that all was not well amongst the board members during May. It has emerged that the bonus pay was agreed in May, just weeks before Schram’s sacking. Lars Boilesen, who chaired the board’s remuneration committee, publicly confirmed that Schram had refused to reduce his severance package against the wishes of the board. Clearly, this level of bonus for a man whose days were numbered doesn’t sit well even with top management.

The bonus has led the Minister for Trade and Industry, Iselin Nybø (V), to demand an official explanation of these bonuses. They were, after all, specifically banned until May 26 as a prerequisite for the financial aid offered by the government last year. Norwegian has confirmed that the first half of the bonuses were paid out of June 25 and the second half to be paid a month later. Yet this less than a month after the government imposed ban on the payments of bonuses expired.

Norwegian feels that the bonuses were justified as they were part of a retention scheme to maintain top personnel and that, ultimately, the cost of these bonuses was not born by taxpayers but by shareholders. Though the bonus payments were made after the deadline expired the question still remains why were they paid and, given the current climate, was it morally right?

So the bonuses were paid for…performance?

So a company that needed huge amounts of public and private investment to stay afloat and was on the brink of collapse less than a year ago has paid millions of kroner in bonuses to its top management. The former and current CEO share some NOK 22 million in bonuses having overseen the crash landing of an airline that used to operate on 4 continents to one that now only makes short-haul European trips.

Norwegian claims that these bonuses were part of a retention scheme to keep highly skilled top management. The former CEO was in charge when the company filed for bankruptcy protection that resulted in massive levels of staff layoffs. The new CEO was the former Chief Financial Officer who oversaw the aggressive over-expansion which took on sky-high levels of debt. Furthermore, these two were in charge when the company took millions of kroner of taxpayer money in order to prop up the fledgling airline. If these were bonuses for anything, it was not for exceptional performance or sound economic management but for sheer incompetence, questionable business planning, and financial mismanagement.

Money
Photo: Gorm Kallestad / SCANPIX .

Bad timing given recent economic climate, money could have been put to better use

Norway has, on the surface, emerged from the economic aftershocks of the COVID-19 pandemic much better placed than many other countries worldwide. Part of the reason why Norway has emerged, relatively unscathed, has been the government’s rapid and wide-ranging economic and financial response. Given that the taxpayer money was a huge factor in the survival of Norwegian, was it then right for such huge bonuses to be paid to top management who, because of questionable business planning and economic management, went cap in hand for taxpayer money?

Having faced the biggest crisis since the Second World War, there is a deep societal acknowledgment of the hardships endured by some. Many of us know someone that either lost their job, was temporarily laid off, had their hours vastly reduced or was receiving financial assistance from the government. Spare a thought for the thousands of Norwegian staff who know that their top management decided to line their own pockets having decimated the workforce. Surely a better use for the money paid in bonuses would have been to support, or bring back completely, some of the staff?

In a period when whole sectors of the economy were ravaged by the pandemic, Norway endured the highest levels of unemployment in living memory and many received financial assistance from the government, the payment of these bonuses, for work during this time, strike one as being more than a little tone-deaf. With much of the country experiencing financial hardships over the past year or so, why then didn’t these “captains of industry” lead by example?

Political repercussions and prevention

Money always talks in an election year. With the prime minister and her government seeking another mandate in September, will the propping up of Norwegian come back to haunt them?

Though they did place a ban on bonuses, there will be questions about why they didn’t place more restrictions on Norwegian when they offered financial assistance. No one is asking for government control of a private business but, surely, when taxpayer money is handed to a business, they have an obligation to try to repay the taxpayer first and foremost rather than deposit the money in top management’s bank accounts.

Lessons about bonuses should have been learned from other countries dealing with the fallout of the 2008 financial crisis. During the bailout of the United States banking system, the US government placed a “maximum salary” of USD 500.000 (approx. NOK 4.3 million) for executives and top management of those companies that received serious assistance from the US government.

Should Norwegian have had a similar cap imposed on its top management when handed taxpayer money? Or do we follow the Swiss model where, after a 2013 referendum, shareholders have total say on the remuneration for top management, executives, and board members of companies thus avoiding these types of extravagant bonuses?

What makes a bonus good or bad?

Whilst some companies’ management use bonuses to line their own pockets, others don’t. Norwegian is now facing a public relations disaster due to these bonuses and claims of unpaid wages to staff.

Conversely, Elkjøp has just announced it will pay NOK 300 million in bonuses to its staff. Though in vastly different industries and financial situations, was Norwegian, in the good times, ever so generous?

Though the bonuses appear to be legal, were they morally right given what has happened to the company during most of the top executive’s recent reign?

Let us not forget that these bonuses were paid to the top management of a major international Norwegian company that was vastly reduced in size, scope, and finances during their reign.

The opinions expressed are those of the author and are not held by Norway Today unless specifically stated.

About the author:

Jonathan is a lover of the written word. He believes the best way to combat this polarization of news and politics, in our time, is by having a balanced view. Both sides of the story are equally important. He also enjoys traveling and live music.

Source: #Norway Today / #NorwayTodayNews

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