Not surprisingly, the retailer asked the court for bonuses to retain executives.
What its bankruptcy means for the rest of the industry.
Sears filed a motion in bankruptcy court late last month 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.
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 “long-standing 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 annual salaries of around $1 million. A larger group of 322 unnamed employees would be eligible for “cash retention awards” equal to between 30 and 40 percent of their salary for staying with the company, which would be paid out of a pool of $16.9 million. While these figures may raise some eyebrows, it’s true that Sears’ 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 that’s also true for 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 have been cut to four, with Sears citing bankruptcy proceedings. (Sears declined to comment on either the severance payments or bonus plans.)
The company is likely to come under close scrutiny, thanks to the announcement last month 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 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. Several executives, meanwhile, walked away with millions in bonuses.
Sears last week secured court approval for $350 million in additional bankruptcy financing that is expected to keep more stores open as it reorganizes, according to Reuters. The bankruptcy judge overseeing the case said the loans — including the retailer’s original round of Chapter 11 financing totaling $300 million — will “benefit everybody.” Sears has not yet said whether it plans to use new funds to beef up employee severances. Sears’ motion is set for Dec. 20.