How Sears and Toys ‘R’ Us Illustrate the True Winners and Losers in Corporate Bankruptcies

Late last week, Sears filed a motion in bankruptcy court seeking approval to pay up to $25 million in executive bonuses during Chapter 11 proceedings.

The request was certain to anger many, coming just weeks after the beleaguered retailer announced nearly 200 additional store closings, representing thousands of employee layoffs and adding to a list of hundreds of locations that it has shuttered in recent years.

Even so, it wasn’t unusual. “Typically companies that enter into Chapter 11 will ask for bonuses to retain and incentivize executives to stay with the company,” said Corali Lopez-Castro, a bankruptcy attorney and managing partner at Kozyak Tropin and Throckmorton.

In the filing, Sears’ lawyers argue that the senior management and employees who would benefit from the bonuses “are critical to [the company’s] ability to maximize stakeholder value through this restructuring process” and that without incentives, they could jump ship, taking with them “institutional knowledge” and “longstanding relationships… that would be difficult and expensive, if not impossible, to replace.”

The bonuses would be contingent on meeting cash flow goals, and would max out at nearly $250,000 on a quarterly basis for a handful of top executives with base salaries of around $1 million per year.

A larger group of 322 unnamed employees would be eligible for “cash retention awards” equal to between 30 and 40 percent of their annual salary for staying on with the company, which would be paid out of a pool of $16.9 million.

And while these figures may raise some eyebrows, it’s true that the company’s managers are likely working under the kind of conditions that might encourage some to leave: stressful and uncertain, with a looming threat of layoffs.

But then, so are the rest of the retailer’s 68,000-odd employees, and none of them are seeing any bonus money — despite the motion’s preliminary statement that, “It is a truism, but for good reason, that employees are the lifeblood of a company.” In fact, some hourly workers told CNN that their promised eight weeks of severance pay has been cut to four weeks, with Sears citing bankruptcy proceedings. (Sears declined to comment on both the severance payments and bonus plans.)

“The people on the line, the people working the stores who have been living with the sword of Damocles hanging over their heads, reading the news reports about — ‘Are they going to close the stores? Are they going to go into bankruptcy?’ — they are not being rewarded in the same way as the executives,” said Lopez-Castro. “And I think that’s going to be the bigger story.”

The company is likely to come under especially close scrutiny thanks to the announcement this week that two of Toys “R” Us’ private-equity owners are setting up a $20 million severance fund to pay former workers who lost their jobs when the company closed its doors. The fund, created by Bain Capital and KKR (but not the company’s third owner, real estate firm Vornado), comes after months of outcry from members of the public and Congress in support of the 31,000 employees that were denied severance when the chain abruptly shuttered its remaining stores over the summer, while several executives walked away with millions in bonuses.

Though the $20 million won’t fully cover the payments most employees expected to receive, and though any money will come after some have been out of work for months, the fund’s existence at all is an unusual win for workers, who aren’t guaranteed any severance pay under bankruptcy law and who are less likely to be able to find other work when a company flounders.

“Typically the people who are paid the least are the ones with the least options,” said Lopez-Castro.

Sears’ motion is set for December 20.

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