When a company has filed for bankruptcy and is closing stores, should the leaders who helped it to get there be rewarded with bonuses? That question has come up in the proceedings for RadioShack’s second bankruptcy in just over two years, and the company’s creditors and court-appointed trustee have responded with a resounding “nope.”
If that sounds familiar, it’s because the original iteration of RadioShack set aside $3 million to give bonuses to executives and key employees the last time it filed for bankruptcy, back in 2015.
The committee of unsecured creditors didn’t necessarily object to the bonus plan, but to its structure, arguing that the plan requires only one thing: that the company keep to its budget to run its remaining business during the bankruptcy proceedings. This doesn’t require any particular effort on the executives’ part, since the budget has already been approved. The employees will not receive the payments if they resign.
“As such, the [bonus plan] is really a disguised retention plan for the Debtors’ most senior management,” the creditors’ attorneys argue [PDF].
In a bankruptcy, it can be legitimate to award bonuses or key employee incentive payments (KEIP) to important executives and employees. The 2005 revision of the U.S. bankruptcy code spells out that these incentive payments have to actually be tied to something that the employee is responsible for, and can’t be a reward for simply sticking around through a reorganization or liquidation.
The KEIPs that RadioShack wants the court to approve depend on the amount that the company is able to redistribute to creditors after paying its bills. The problem, the creditors argue, is that the company is on target to hit the maximum amount by June, which would mean all $1.4 million in the bonus pool would be paid out.
While the identities of the employees who would receive the bonuses has been withheld from the public, the bankruptcy trustee knows who they are, and writes that it’s not clear exactly what those insiders’ job duties have to do with how much money is re-distributed to creditors. If they’re to earn an “incentive” based on that amount, then the company needs to prove that the amount that the Shack hands over to their creditors is the direct responsibility of those seven people.
“The Debtors have not established how the work performed by the KEIP recipients will directly affect the net proceeds available to creditors or when,” the trustee notes in his objection [PDF].
As Sports Authority wound down its affairs last year, the judge overseeing its case initially rejected the company’s plan to give bonuses to certain executives, citing similar reasons to the current argument against RadioShack, as well as angry emails from employees sent to the bankruptcy court.
There will be a hearing on the bonus proposal, among other things, on Monday, April 24, and we’ll find out what the judge has to say then.