There are some legal hurdles standing in the way of Neiman Marcus Group executives and their bonuses: A lawyer from the Justice Department has recommended that a judge reject the bankrupt company’s key employee incentive plan (KEIP) unless executives can prove they helped boost NMG’s earnings.
Attorneys for Neiman Marcus are set to ask a U.S. bankruptcy judge Friday to approve a KEIP that would award a maximum of $10 million to eight top execs — with a payout of as much as $6 million going to CEO Geoffroy van Raemdonck. In addition, Neiman Marcus is requesting up to $8.7 million in pay for 239 other employees, including 17 senior vice presidents, 82 vice presidents, 40 directors and up to 100 eligible “key associates.” The retailer says these bonuses would go to members of its workforce who are “critical to day-to-day operations” and would be “difficult and costly” to replace.
But according to the DoJ watchdog, Henry Hobbs, execs must show that the payouts are more than “pay to stay” bonuses, which are illegal under U.S. bankruptcy law. A statute was added to the bankruptcy code prohibiting such payouts in 2005, Hobbs wrote, in response to “glaring abuses of the bankruptcy system” by execs from companies such as Enron and Polaroid.
In order to pay out the bonuses, Hobbs said, NMG must first show that “a nexus exists between the specific work duties of the KEIP participants and the achievement of the performance goals; and the performance goals represent challenging, incentive-based benchmarks.” Otherwise, the company must prove that the execs “have bona fide offers from other businesses at the same or greater rate of compensation” and are “essential” to the survival of the business.
Facing pressure stemming from a multi-billion-dollar debt load, declining foot traffic and increased digital competition, Neiman Marcus announced a four-year transformation plan centered on omnichannel and supply chain technology investments two years ago. The company had managed to avoid bankruptcy in 2019 after reworking some of its debt, and was looking into various strategies to shore up capital, including the potential sale or IPO of the MyTheresa e-commerce site. But Neiman Marcus’ existing challenges were exacerbated in mid-March, when the coronavirus forced it to temporarily shutter its entire fleet, driving sales downward.
Neiman Marcus filed for Chapter 11 protection on May 7 in Texas bankruptcy court, listing estimated assets in the range of $1 billion and $10 billion, roughly on par with its estimated liabilities. It reached an agreement in May with creditors for $675 million in debtor-in-possession financing. Post-bankruptcy, Neiman Marcus expects to eliminate $4 billion of debt, with no near-term maturities. The company is aiming to emerge from Chapter 11 by early fall.