Debtor Employee Retention and Incentive Compensation Programs

Bankruptcy Code section 503(c) severely limits a debtors ability to pay management retention bonuses, severance, and other amounts. Holding on to valuable employees during a bankruptcy case can be a daunting task, and this Emerging Issues Analysis offers specific best practices guidelines for corporate debtors seeking to formulate compensation programs that comply with section 503(c).
Determining the Need for, and Propriety of, a Compensation Program

In determining whether to approve a debtor employee compensation program (whether structured as an initiative to motivate enhanced performance or a traditional pre-BAPCPA "pay-to-stay" retention initiative), among the factors that courts consider is the due diligence that has been undertaken in investigating the need for and propriety of such a program. A debtor should not blindly presuppose that a bankruptcy-specific compensation program is necessary or appropriate. The debtor, by way of the independent directors serving on its compensation committee (ideally working in consultation with independent professionals), should inform itself of the relevant facts and make a determination about whether an employee compensation program is necessary and appropriate in light of those facts.

While they will vary from case to case, relevant facts for determining whether a bankruptcy-specific compensation program is needed may include (i) the extent to which the debtor's bankruptcy filing and/or financial condition has decreased morale and distracted key employees from the performance of their duties, (ii) the elimination in value of employee stock options and other equity-based awards and whether those options and awards have historically constituted a significant portion of employee compensation, (iii) the degree to which the debtor's bankruptcy might cause key employees to seek other employment, and (iv) the additional burdens and duties imposed upon employees as a result of the bankruptcy and whether current compensation levels are sufficient to compensate employees to perform such duties.

Similarly, the facts of the debtor's case will determine whether a bankruptcy-specific compensation program is appropriate. While the adoption of a bankruptcy-specific compensation program may be desirable to retain and motivate employees ceteris paribus, the adoption of such a program may not be appropriate if it imperils the debtor's ability to achieve important reorganization objectives. [footnote omitted]