Bonuses amid bankruptcy draw ire of axed workers

While executives at companies such as DaimlerChrysler AG and British Airways are taking voluntary pay cuts during the economic downturn, captains of sinking corporate ships like Kmart Corp. and Enron Corp. are asking for millions to stay on.

Kmart, based in Troy, Mich., is awarding retention bonuses worth $150 million to managers while more than 22,000 workers are sent home without severance, for example, and Houston's Enron is paying $140 million to hold key personnel while cutting about 4,500 jobs.

Kmart and Enron are among the biggest-ever Chapter 11s. In fact, five of the 15 biggest bankruptcies of all time have been filed this year, according to the American Bankruptcy Institute.

But industry giants are not the only ones doling out "pay to stay" bonuses – financial rewards meant to persuade key executives to stay until the company is on firmer financial footing.

Nearly 10,000 bankruptcies were filed in the first quarter of 2002 alone, and experts say companies of all sizes are turning to these controversial cash payments as a retention strategy.

The practice has been used for decades, but the rash of big bonuses is bringing more public pressure and court scrutiny.

"There is a double standard for workers," says Dieter Waizenegger, research analyst at the AFL-CIO's office of investment. "The CEOs rake in huge retention bonuses and the workers are left holding the bag."

Mr. Waizenegger says Big K is rewarding its outgoing chief executive for poor performance. Just before Kmart filed for bankruptcy, CEO Chuck Conaway walked away with a golden parachute worth at least $9.5 million that included a severance package worth three times his $1.5 million base salary, and forgiveness of a $5 million loan.

Meanwhile, employees at Kmart's 284 closing stores will not receive a severance package. Kmart executives declined to comment.

"The issue is one of basic fairness," says Thomas Kochan, professor of management at the Sloan School of Management at the Massachusetts Institute of Technology. "People can accept sacrifice if others are sharing equally in the burden, but this is such a stark departure from anything that people would see as fair that it is just not acceptable."

The Polaroid case in Cambridge, Mass., hits home the hardest for Mr. Kochan. Career-employees rallied around the instant-film company in the 1980s, making personal investments to save it from a hostile takeover.

Today, many of those employees have lost their investments, pensions, and benefits while newcomer executives draw pay during bankruptcy proceedings. Polaroid executives also declined to comment.

The argument for retention bonuses is based on sound reasoning: The bankrupt company needs executive talent to revive the organization.

Still, some view it as ironic that company captains are receiving major money to stay on board when they are presumably the ones who steered the business into the rocks.

Of course, there are cases when unforeseeable market conditions – such as Sept. 11 – take the blame. In other cases, new executives are hired after the firm has filed for bankruptcy protection.

"Imagine what it would be like to attract somebody to a Chapter 11 company in the middle of the bankruptcy," says Paul Platten, managing consultant at the Boston office of Watson Wyatt. "What's your choice?"

Even if you could find a qualified outside executive to tackle the project, the flagging company could close for good while new executives learn the anatomy of the business.

"Very few companies could withstand that learning curve," says Peter Tourtellot, chairman of the Turnaround Management Association. "That's why, in many cases, retention bonuses are a good thing."

It's a balancing act, says John Challenger, chief executive officer of the international outplacement firm Challenger, Gray & Christmas Inc. "When you bring new executives in, you lose a lot of situation-specific knowledge that you can't afford to lose in those crisis days," says Mr. Challenger. "But it's hard to find the right balance because of the unseemliness" of the situation.

It's this unseemliness that is causing those on the outside to take a closer look at the inside operations of companies seeking high-dollar retention bonuses during bankruptcy.

Mr. Kochan says these questionable moves are mobilizing employees to fight back. The Severed Enron Employees Coalition (SEEC), for one, is seeking relief from the court.

"Enron has not paid severance and other owed monies to the severed employees," says former Enron manager and SEEC chairman Rod Jordan. "Companies should always pay their bills first and give themselves bonuses second or last."

Enron declined to comment.

H. DeWayne "Cooter" Hale, a bankruptcy partner in the Dallas office of Baker & McKenzie, says courts are giving more scrutiny to retention bonuses in light of recent cases and public outcry.

"There is a place for stay bonuses, but the courts have to be very careful in honoring them because there's too much opportunity for mischief," says Mr. Hale. "The last thing a judge wants to do at the end of the case is to be totally embarrassed by letting management get extraordinary payments and leave creditors holding the empty bag."