Borders Group Inc. (BGP) needs to change its executive bonus plan, a judge said, after a lawyer for creditors said the bankrupt book seller wants to pay key managers to stay while it considers a sale or reorganization.
Bruce Buechler, a lawyer for unsecured creditors, told U.S. Bankruptcy Judge Martin Glenn that the bonus plan was revised today so the five top executives, including Chief Executive Officer Mike Edwards and Chief Financial Officer Scott Henry, would be paid based on how much they recover for creditors under a sale or restructuring by Aug. 15.
“As we look at running a sales process -- selling all the debtors’ assets or infusing equity into the company instead of just a stand-alone plan, we need management not just to be there, but to be cheerleaders or affirmative spokespeople for the company,” Buechler said at a court hearing in Manhattan.
Glenn said the revised plan needs work and he told lawyers to negotiate with the U.S. Trustee in the hall outside his courtroom. The U.S. Trustee, a bankruptcy watchdog for the Justice Department, said the bonuses were premature since Borders has only been in bankruptcy two months and hasn’t shown how it will reorganize or pay unsecured creditors.
“If this business goes down the toilet bowl, there are a lot of full or part-time employees who face the prospect of going out of work,” Glenn said.
“We look forward to meeting with the U.S. Trustee to demonstrate to them that this proposed program is in the best interest of Borders, its creditors and other stakeholders,” Jeremy Fielding, a company spokesman, said in a statement. “Our objective is to create value to benefit the creditors and all of the company’s stakeholders, so that Borders can exit Chapter 11 in short order.”
Fielding declined to comment further on the progress of any sales talks.
Borders, the second-largest book chain after Barnes & Noble Inc. (BKS), filed for bankruptcy in February and has since begun winding down about 225 stores. A bonus plan should be implemented quickly, said John Dempsey, a partner at Mercer Inc., a compensation consultant for Borders. The company’s annual revenue upon leaving court protection may drop to $1.5 billion from its pre-bankruptcy level of about $2.3 billion, according to court papers.
“Based on my experience, retailers have to move on a faster track than other debtors in order to survive Chapter 11 and avoid a liquidation,” Dempsey said.
Buechler told Glenn that the revised plan for the top five executives proposed giving them $4.9 million at most if they return more than $95 million to unsecured creditors. They could get $1.8 million if $73 million is recovered. The amounts apply if a plan is confirmed or the company is sold by Aug. 15.
Glenn said Borders should include a scenario where less than $73 million is recovered.
Borders said in court papers filed before today’s hearing that bonuses for a broader group had been scaled back to a maximum of $6.6 million for 15 executives, rather than $7.1 million for 17 executives, because a senior vice president and vice president left in the 2 1/2 weeks since it filed its bonus request.
“The more employees the debtors lose, the harder the debtors’ senior management and director-level employees must work to compensate,” Borders’s lawyers wrote.
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