Frontier: Yes, yes, we've filed for bankruptcy protection, but that's not stopping us giving key staff $38m in bonuses

Judge tells US ISP: OK, seems fair

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Despite filing for Chapter 11 bankruptcy, US ISP Frontier Communications has insisted on giving key staff $38m in bonuses and other incentives – and an American judge has agreed.

The telco's “employee retention plan” was opposed [PDF] by some creditors, including the bankruptcy trustee, although not for the reason you might imagine. All those involved have approached the issue from the perspective of how to help Frontier function normally if or when it emerges from bankruptcy protection.

As such, paying bonuses and “retention payments” to employees who rode the internet provider down the tubes was seen as “reasonable under the circumstances.”

Following a crunch hearing late last week, in which dozens of measures were decided to move the cash-strapped corporation forward, Frontier agreed to withhold a third of those payments until after the restructuring and that was seemingly enough for the objectors to withdraw and the judge to give the deal the OK, enriching staff to the tune of millions of dollars.

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That decision is all the more remarkable given that it was terrible business decisions that put the company into an untenable financial position in the first place. Frontier took on enormous debt to buy out Verizon’s operations in California, Florida and Texas – paying $10.5bn in 2016 in an effort to become a national powerhouse – but massively overestimated its ability to operate in those markets, and ended up losing over a million customers.

It also drank its own Kool-Aid and believed that it could continue to service its customers using copper wires rather than upgrade to fiber. When Frontier realized punters were moving to the greater speed and bandwidth of fiber, however, it was unable to fund the necessary network upgrades, thanks in part to its massive debt pile.

As a result, Frontier filed for Chapter 11 bankruptcy protection, during which it hopes to wipe $10bn off its $17.5bn debt mountain. The company’s creditors have agreed to take additional equity in the company in place of cash, and the biz will sell its operations in Idaho, Montana, Oregon, and Washington for $1.3bn to bring in some extra money.

How does paying bonuses work in this context? Well, the ISP realized in 2018 that its workers knew it had bitten off more than it could chew with the Verizon deal two years earlier, and were starting to jump ship to rivals.

So Frontier created an employee compensation program to keep key people onboard. They are so-called “non-insider employees.” In total that scheme amounted to $37.7m for 390 staffers – just under $100,000 a head – that came in three forms: performance bonuses; retention payments intended to keep that at the company in place of equity; and a “reserve pool” to keep paying people while the internet provider went through bankruptcy protection. The ISP employs some 17,000 people across America.

Without the money, Frontier, several hundred of its best people would probably have left by the time it came out of Chapter 11, in large part because they never got the money they were promised to stay. And so, in order to give the company a chance of surviving, they get their payouts.

Except, under the agreement reached in bankruptcy court, they will only get two-thirds of the money upfront and will have to wait for the final third when Frontier is up-and-running as normal again.

You see, all perfectly logical. And, amazingly enough, a fairly common practice in the world of high-finance: Toys R Us non-insider bonuses were $68m when it went under; Sears spent $25m retaining its execs in the same situation; and iHeartMedia paid its employee bonuses before it even paid the artists whose music the entire business was built on top of.

It's good to be king. ®

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