Floyd Norris continues his reporting (N.Y. Times) on the battle over executive pay for bankrupt Dana Corporation, an auto parts maker. Restrictions passed in 2005 limit the ability to pay executives of bankrupt companies a bonus merely to stay with the company. I previously posted on another of Mr. Norris’s columns noting that corporate bankruptcy attorneys expected this provision to have little substantive effect. It is easy to structure a bonus plan so the payment is for some easily attainable goal, such as having the company emerge from bankruptcy, rather for staying with the company.

Today, however, Mr. Norris notes that the U.S. Trustee has filed a brief opposing Dana’s bonus plan. That ups the ante. The U.S. Trustee has joined Dana’s creditors in arguing that the company’s compensation plan should be recharacterized as a retention plan. Dana would pay its executives a  large bonus if the company emerges from bankruptcy and another large bonus if the company’s securities hit certain targets six months after bankruptcy. The U.S. Trustee and the creditors argue that the targets are so low and likely to be met that the bonuses are not true incentives and thus are better characterized as retention bonuses.

What will happen if the bankruptcy court rules against Dana? Will such a ruling cause bankrupt companies to avoid filing in Manhattan, much as a ruling in the K-Mart case caused bankrupt companies to avoid filing in Chicago? Is Dana’s compensation plan out of line with what other companies in chapter 11 are doing?