Will a Bonus Stop a Breach?
Creditors, Laid-Off Workers Question Fairness of Payments

By Sabrina Jones
Washington Post Staff Writer
Tuesday, April 30, 2002; Page E01

Executives of AMF Bowling Inc. got $1.2 million in bonuses to stay with the company while it reorganized in bankruptcy court. Steven G. Opilla got $1,300 -- for $6,000 worth of coffee he'd sold them.

AMF's larger creditors thought that keeping managers around would get them the maximum payback in the end. Opilla, a coffee supplier with six employees, only saw money leaving his pockets.

"That's how they get their bonuses, by screwing little guys like me," said Opilla, owner of James River Coffee in Midlothian, Va. "I'm just a coffee supplier. That they were drinking free coffee on me after they declared bankruptcy really irritated me."

Opilla's outrage points to a trade-off being made often during the recent tide of bankruptcies, from Enron Corp. to Washington area firms such as W.R. Grace & Co., whose chief executive pocketed a $1.4 million retention bonus last year.

Companies extol the payments as a proven way to prevent key employees from jumping ship, keep the businesses running, maximize payments to creditors and shorten their time in court. But business experts, workers who lose their jobs and creditors who are repaid less than they are owed are increasingly asking whether they are fair.

"The amounts would appear to the common person as being excessive. . . . It has created a public relations problem for many firms with the public in general, and also with employees and stockholders," said Barron H. Harvey, dean of the School of Business at Washington's Howard University.

Just two weeks ago, a bankruptcy judge ruled that Enron can pay as much as $140 million in employee bonuses, including about $40 million in retention bonuses, to 1,700 employees. The Houston energy company said it needed the bonuses because workers were quitting at an average of one per business hour. A few months earlier, the company had given laid-off workers only $4,500 each in severance pay, a move that some of those workers turned into a populist cause under the rallying cry of Jesse L. Jackson.

Sometimes, even creditor-approved plans can go too far. Polaroid Corp. changed its original plan to pay at least $5 million in bonuses to top executives following the protests of employees and retirees, who lost their medical and life insurance payments before the company's bankruptcy filing. This month, a bankruptcy judge authorized the company to pay as much as $4.5 million in bonuses to 40 executives, but the revised plan excluded chief executive Gary DiCamillo.

William T. Plummer of Concord, Mass., contrasts the bonuses to the $278,000 in life insurance premium payments he lost after he retired from Polaroid last March.

Five years ago, Polaroid introduced a life insurance program for certain managers, including Plummer, who headed an optical-engineering division. The company contributed large premium paymnents to the program, which in Plummer's case reached about $70,000 a year. When the company's financial problems grew, it ended its life insurance benefits, including the payments. Plummer and other employees also lost their medical and dental coverage and portions of their severance pay and retirement savings.

Plummer said he would rather see Polaroid's executives get bonuses in the form of "smoke and mirrors."

"These are the people who have run [the company] downhill," said Plummer, 63, who worked for Polaroid for 31 years and is now an independent optical engineering consultant. "We're talking about people who would probably have a hard time finding a job. The ethical issues are rather terrible. We had previous management in Polaroid that made a lot of mistakes, but they weren't greedy about it."

Polaroid spokesman Skip Colcord said the elimination of retiree health benefits was difficult but necessary -- and that retention bonuses were necessary as well. About 15 percent of the company's U.S. employees have resigned since it filed for Chapter 11 protection in October, he said. This month, Polaroid signed an agreement to sell its assets to One Equity Partners, a division of Chicago-based Bank One Corp.

"Chapter 11 is a very difficult environment to operate under," Colcord said. "We've lost a number of key employees already and asked the court for some modest incentives. It's not just executives."

Retention bonuses have become more prominent in the dot-com bust as failed tech firms try to protect intellectual property, said Samuel J. Gerdano, executive director of the American Bankruptcy Institute in Alexandria. The duties for workers who remain with firms range from supervising the restructuring of a firm to completing an orderly liquidation.

"If bits and pieces of the company will be cannibalized or sold off, who should do that?" Gerdano said. "It's not something you sell on eBay. You have to have experienced people if you want to maximize the recovery. There's no room for amateurs."

AMF Bowling credits its retention plan for helping it get out of bankruptcy. Under AMF's plan, 19 key managers, including chief executive Roland C. Smith, were eligible to receive bonuses ranging from 25 percent to 200 percent of their base salaries if they stayed through the reorganization. Sixteen of the 19 stayed.

Last month, AMF obtained $350 million in new financing and emerged from Chapter 11 bankruptcy protection.

"In any kind of Chapter 11 bankruptcy, there is an extremely high stress level," said Merrell Wreden, AMF's spokesman. "We all felt that we had a viable business and that with a lot of hard work we could get through bankruptcy. The bonuses were to encourage key executives to stay, to put in some extra time and effort, and it took a lot of that to get through the bankruptcy."

Sometimes it's not so clear what the bonuses reward. After filing for bankruptcy protection last April, Herndon wireless firm WinStar Communications Inc. granted "stay" bonuses to about 2,600 employees, from managers to operations workers. The amount of payments was estimated to total $18.1 million, according to court documents. Then the firm laid off some of those employees weeks later.

Mark McCurley of Purcellville, Va., was one of them. He worked as a sales engineer for WinStar for a year and received two retention payments totaling $7,000. The first came during the company's first round of layoffs in May, and he was later given a second bonus. Soon after, he was laid off when WinStar scrapped his entire division. The company was later sold to New Jersey telecom firm IDT Corp., which did not return repeated calls for comment.

"They were giving retention bonuses to people they knew they were going to get rid of," said McCurley, 39.

Creditors normally understand that the cost of keeping good managers is sometimes high, considering the market demand for executives and the fact that less than 25 percent of companies in Chapter 11 successfully reorganize, said Francis P. Dicello, a partner in the bankruptcy group at the D.C. law firm Reed Smith LLP.

Company boards of directors, often under pressure from creditors, sometimes oust poorly performing managers and replace them with workers who command large bonuses, Dicello said.

"A really good manager is indispensable to turning a company around because he has to motivate a lot of employees to stay, and he has to encourage people to deal with the company while he tries to either sell it or restructure it," Dicello said.

At Reston-based Motient Corp., chief executive Walter V. Purnell Jr. selected 27 employees, mostly senior executives and middle and lower-ranking managers, to be given $325,000 in retention bonuses, shortly after other employees were informed that they would receive only half of their 2001 year-end bonuses. The year-end bonuses were rescinded for the company's executives but might be paid out later.

Unlike at some other companies, the retention bonuses were dependent upon Motient exiting Chapter 11, Purnell said. The bonuses ranged from $2,500 to $50,000 for chosen staffers and were approved by a creditors committee. The company emerged from bankruptcy last week, about three months after it sought court protection.

"Some of the other [bonus] numbers that I see for other companies are just egregious," Purnell said. "I explained to the employees that there were going to be a couple dozen of these retention bonuses, and they weren't going to be very much. It's like a get-well-quick card. It's more the thought than anything else."

And the thought behind bonuses counts, said Christian Larson of Richmond. He left his sales position at Ashburn-based telecommunications firm PSINet more than a year before the company filed for Chapter 11 last June. Then, he worked as an account executive in the Sterling office of Exodus Communications Inc., a California-based technology firm that filed for bankruptcy in September 2001. He was given a monthly retention bonus for three months. He would have likely left the company sooner without it, he said.

"I think it's one of those things where you need to hold onto your people," said Larson, 28, who left Exodus in January to join another company. "In a service company like this, your people are your commodity. Virtually everybody stayed. I was amazed. Coming from a company like Exodus, you're in demand at companies that offer similar services. I think Exodus knew that."

Researcher Richard Drezen and staff writer Yuki Noguchi contributed to this report.