It sounds like a plan to reward poor performance. Having just secured $350 million in financing to literally keep the doors open, Sears Holdings (NASDAQOTH: SHLDQ) -- which filed for bankruptcy protection last month -- wants to pay $25 million in bonuses to its executives. At a time when the retailer is closing dozens of stores and people are losing their jobs, the optics of giving a windfall to the very people who helped drive the company into the ground are terrible.
Yet as bad as it looks, it is not necessarily unwise, and is something that many companies in a similar position do because it can actually help the business survive.
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A necessary evil
While Sears has declared bankruptcy, it is still operating. Although it is shuttering 142 unprofitable stores as it attempts to restructure, many hundreds more are remaining open, and if Sears can make it through the bankruptcy process, tens of thousands of employees will retain their jobs.
But the parent and Sears and Kmart won't be able to survive bankruptcy if it can't get management to stay. A failing business is not a talent magnet, and executives will be warily calculating how long it might be before they lose their jobs, so they will begin hunting for new positions. A massive brain drain for the business could put it on the fast track to liquidation. The bonuses are an inducement to stay and help the company survive for the betterment of everyone.
Sears has asked the court for permission to give 18 top executives, including the chief financial officer, chief digital officer, chief commercial officer, and various group presidents, up to $8.5 million combined in bonuses. The CFO, the CDO, and the president of the retailer's clothing and footwear business, who are tasked with running the company during bankruptcy proceedings, would receive the largest payouts. The bonuses would be based on meeting cash flow targets, with larger payouts coming with better performance.
Chairman Eddie Lampert is not among the executives in line for a bonus. The company is also seeking permission from the bankruptcy court to pay bonuses to 322 other unnamed executives from a pool of $16.9 million.
Not uncommon practice
To the workers losing their jobs, it's a bitter pill to see managers be so well compensated, but Sears is not alone in attempting to keep talent by paying them bonuses. iHeartMedia, which filed for bankruptcy protection in March, has asked the court to let it pay some $33 million in bonuses to its executives, while Toys R Us got conditional court approval to pay $14 million in bonuses to try to help the company emerge from bankruptcy when it filed.
The Toys R Us situation was more controversial because the U.S. Trustee's Office, which serves as a watchdog in bankruptcy proceedings, objected to the payouts because the executives were already well compensated and the earnings marker the toy company was using to determine whether the bonuses were paid could be easily manipulated. The bankruptcy judge, however, overruled the objections and said that if Toys R Us generated $484 million in adjusted earnings through the holiday season, the bonuses could begin being paid. If it made $550 million, the full $14 million could be paid.
Ultimately Toys R Us failed to achieve those benchmarks and the bonuses were not paid. But bonuses totaling $8.2 million that were approved by the toy retailer a week before it filed for bankruptcy protection were paid out despite the company's failure.
Courts don't always allow bonuses to be paid. When Sports Authority went bankrupt, it sought permission to pay $2.8 million in bonuses to the four executives overseeing the retailer's operation as it wound down the business. The court, however, said it was "inappropriate" to pay executives when all workers would be losing their jobs.
As objectionable as it may seem to pay Sears Holdings top executives bonuses when they were the ones guiding the company when it sank, if it hopes to keep operating and eventually emerge from bankruptcy protection, $25 million in payouts may be a small price to pay so that tens of thousands of workers can keep on working.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.