April 9, 2012 at 3:10 PM ET
Eastman Kodak Co. has filed a request with the district court overseeing its Chapter 11 bankruptcy asking for permission to pay around $13.5 million in bonuses to approximately 300 employees to keep them on board during and after the restructuring.
This pay-to-stay practice was ostensibly quashed by bankruptcy reform legislation years ago. But the onetime imaging giant wants the court to grant an exception. It contends that these employees are critical to the company's turnaround and will quit without the incentives.
Historically, the problem with big bonuses in bankruptcy was that conferring them often came at the expense of rank-and-file workers. In 2001, Polaroid filed for bankruptcy and eliminated severance and insurance payments — then turned around and gave top brass $4.5 million in bonuses. Congress made changes to the corporate bankruptcy code in 2005 aimed at preventing this kind of lopsided treatment of executives and ordinary workers, but Kodak wants an exception.
In court documents, the company argues that because the portion of executives' compensation consisting of company stock had become nearly worthless, these employees had taken what amounted to a pay cut by continuing to work there. Without the bonuses, it contends, these workers are likely to be poached by competitors who can offer them more money, and finding people with the knowledge and skills to take their places will be time-consuming and expensive.
Kodak spokesman Christopher Veronda said the bonuses were a necessary response to what he described as an "increased amount" of people leaving the company. "We haven't quantified it but certainly there have been departures," he said.
The Eastman Kodak Retiree Association, which previously clashed with the company over a proposal to cut retiree healthcare benefits, expressed a degree of support for the bonus plan. "Our view on this is that Kodak has to do what it thinks is necessary to make the company competitive by retaining good people," spokesman Bob Volpe said via email. "If these people can help make Kodak successful, maybe there will be less pressure to cut retiree benefits."
The bulk of the money — $8.5 million — would go to 119 workers at the middle management level and above, with the remainder going to 200 employees further down the corporate ladder. Kodak's description of the employees on its bonus list was both sweeping and vague. It said bonus recipients "would be identified based on skills and leadership, on the one hand, and external marketability considerations, on the other hand."
"I'm not sure Kodak provides enough detail to justify the use of these money," Katherine Porter, professor at UC Irvine School of Law, said. Porter said the large number of intended recipients didn't give her the impression of a cash grab by top brass, but she added that the creditors need to get more detail about who these people are and why they deserve extra compensation.
Veronda described the employees as "mission-critical people it would be really costly to replace if they left, and/or leave a real knowledge gap if they left." He acknowledged that the creditor committee might press for more details about who these people are and what they do before agreeing to green-light bonuses.
Ethan Bernstein, a Kauffman Foundation Fellow on leave from Harvard Law School, studied the "flight risk" of CEOs at companies that went through bankruptcy as compared with those that restructured privately, and found that bankruptcy wasn't any more or less likely to lead to a departure. "From a similar framing, the 'smell test' here is whether the bonuses being proposed at Kodak would be supported by those in control of a private restructuring," he said via email. "That's a much harder question to answer."
Steven Kropp, professor at Roger Williams University School of Law, expressed skepticism that upper management would be in high demand, given Kodak's protracted and well-documented struggles to remain competitive. "You're left wondering why are these people so badly wanted, when they're the ones who have basically pushed the company into bankruptcy," he said. Kodak might be concerned about retaining lower-level workers with highly specialized technical skills — a group that could include the 200 non-managers in the company's proposal — but Kropp said these workers are less likely to have the financial means to relocate far from Kodak's Rochester, N.Y., headquarters.
Kodak's request to the court doesn't provide any documentation that these workers are being poached or are quitting, Porter added. "They say they've had employees leave and have had turnover, but they don't quantify that," she said.