Will The New Bankruptcy Law Drive Away Top Talent?
from
January/February 2006
by Randy Myers
Not only does the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 make it more difficult for individuals to enter
bankruptcy proceedings, it will also make life harder for some
corporations trying to get out of Chapter 11. Among other things, the
law imposes tough restrictions on what had become a popular practice in
corporate bankruptcies—paying key executives extra to induce them to
stay on the job. If these folks quit to join a healthier enterprise,
more companies may be forced to work through Chapter 11 without the
executives who know the business best. Under the new law, somebody can
be paid more to stay on only if he or she gets a bona fide job offer
from another business at equal or greater pay.
Those so-called key-employee retention programs sometimes lavished rewards on the very executives who’d landed a company in Chapter 11 in the first place. Nevertheless, Stephen Mader, vice chairman and head of the board services-CEO practice at executive recruiter Christian & Timbers in Boston, thinks the new law goes too far. “It seems to be saying that if the executive would like to see the bankruptcy through but is unhappy with the pay or perceived risk he is facing, the only solution is to occupy his time and someone else’s by going out and getting a competitive offer and raising the ante,” he says.
Penn Ayers Butler, of counsel to the law firm of Squire Sanders & Dempsey in Palo Alto, California, cites another “unfortunate cosequence” of the new law. He points out that if executives opt to leave, the company’s likely alternative would be to hire a third-party turnaround expert; that, he adds, would almost certainly be more expensive than all but the most egregious retention payout. Attorney Joel H. Levitin, a partner with Dechert LLP in New York City, agrees: “Most well-known crisis-management groups charge by the hour at rates similar to big law firms. Teams of people spending 20 hours a day getting up to speed on the operations of a company gets very expensive. It’s not unusual to reach several hundred thousand dollars a month, and for very large companies it could be millions.”
Boards eager to retain key executives in future bankruptcy cases have several options, Butler says, but he notes that each would have to pass muster with the bankruptcy court. One possible tack would be to have an executive resign and then retain him or her as a consultant. Another would be to revise the terms of the executive’s contract so that it offers extra compensation for meeting particular performance targets. “The new statute says nothing about incentive-based or performance-based bonus plans,” says Butler. Levitin says he hopes courts will still see their way to okaying retention plans that meet the approval of creditors and other stakeholders.
If a company you serve is staring at a bankruptcy filing, you’ll clearly want to start thinking now about how to keep your key executives from jumping ship. Assuming, of course, that you still want them around.
