A court battle is brewing over the touchy subject of bonuses for executives at bankrupt companies.
Boscov’s, a family-owned department store chain that filed for Chapter 11 protection in August, has asked a Delaware judge to approve an incentive program for six senior executives that could pay out a total of $1.45 million if certain targets are met.
But the United States Trustee overseeing the case is crying foul. In an objection filed with the court this week, the acting trustee, Roberta A. DeAngelis, has urged a judge to reject the program, arguing its performance hurdles are too low.
The final decision lies with the bankruptcy judge, who was scheduled to consider the matter at a hearing on Friday.
But this much is already clear: Three years after the law was changed in an attempt to curb bonuses in bankruptcy cases, there is still plenty of debate about what the change really means.
When Congress overhauled the bankruptcy code in 2005, a provision requested by Senator Edward M. Kennedy, a Massachusetts Democrat, restricted the use of so-called key employee retention plans, known as KERPs.
These kinds of payouts for top executives had been routinely requested by bankrupt companies, and routinely approved by judges. But critics argued that it was unfair to write big checks to top executives even as employees faced pay cuts or layoffs.
Since the change, many bankruptcy lawyers have argued that performance-based bonus plans — as opposed to plans that simply require the recipient to stay employed until a certain date — are still allowed.
Indeed, several performance-based plans have been approved since then. But in 2006, a New York bankruptcy judge rejected the initial version of a pay plan for executives of Dana, the auto-parts maker. The court later approved a modified plan.
The incentive plan that Boscov’s has requested would award a bonus to certain senior executives, including Chief Executive Kenneth S. Lakin, if the company’s reorganization plan is confirmed by the court before Feb. 28, 2009, or if most of the company’s assets are sold before Jan. 6, 2009.
In its motion seeking the court’s blessing for the plan, Boscov’s said the program should be allowed because it is “strictly performance-based.” It also said that the executives won’t be getting bonuses under their previous incentive programs, yet they are being asked to make “extraordinary efforts” in the Chapter 11 case.
But Ms. DeAngelis, the trustee, argues that the performance part is little more than a smoke screen. In essence, she wrote in her objection, the plan rewards executives “for simply remaining employed by the company and completing tasks which they are required to perform.”
