WHITE PLAINS, N.Y. — Add an executive bonus program to the list of things that need fixing at A&P.
The judge in the retailer's Chapter 11 bankruptcy case last week approved a short-term incentive program for some salaried employees but sent the retailer's top executives back to the drawing board.
The decision to split the $6.5 million Key Employee Incentive Plan (KEIP) simultaneously satisfied and disappointed both A&P and its creditors. Sam Martin, A&P's chief executive officer, testified that an immediate incentive plan was crucial to the company's operational and financial turnaround, but creditors successfully argued that top management should better align its goals with those of its constituents in the case. The matter was officially adjourned until a hearing in late April, but the judge, Robert Drain, warned A&P's attorneys he would likely reject the plan again if changes weren't made.
Martin acknowledged the decision to deny top executives from participating in the proposed KEIP introduced "significant risk" to A&P's ongoing financial and operation turnaround, saying that his executive team — named only months before the company filed for Chapter 11 protection in December — had anticipated they would have the opportunity to earn bonuses as part of their compensation, and would be difficult to replace if they were to leave.
"Replacing them without any short-term incentive plan would be near impossible, and would imply that other people would have to do their work. And at this point in time, there is no cushion," he testified. "We have to do the work to run the business, and we have to do the work to fix the business, and that's much more than a typical company would have to do under normal circumstances."
The rejection affected three "Tier 1" employees who could earn cash bonuses of up to 175% of their base salaries over a seven-month period beginning this month for reaching certain levels of same-store sales growth and merchandise margins: Tom O'Boyle, executive vice president of marketing and merchandising; Carter Knox, senior vice president of human resources; and Paul Hertz, executive vice president of operations. Maximum bonuses for the three could reach $1.5 million in total.
Both Martin and Jake Brace, A&P's chief restructuring officer, elected not to participate in the KEIP but were expected to propose separate retention plans for a hearing April 28. Chris McGarry, A&P's general counsel, opted out of the group of Tier 1 employees last week and was also expected to seek a separate retention plan.
In the meantime 140 salaried employees of A&P, including the company's chief information officer, senior vice presidents, vice presidents, senior directors, directors, district managers and senior category managers, were granted the opportunity to earn bonuses of up to 100% of their base salaries for reaching the same goals in the same period. Drain noted this plan was “not a layup or a walk in the park.”
But Drain agreed with objectors — including the official committee of creditors, the U.S. Trustee overseeing the case and several labor groups — who argued the retention for top executives was inappropriately structured and premature. They said the bonus plan should have awards based on improving EBITDA, as that would best raise the value of the estate; and said they wouldn't approve any incentive plan until A&P could first show them a business plan. Martin said A&P anticipated having a business plan to present "in a few weeks."
"I'm not sure the top five guys in this company can say that same-store sales and merchandising is under their control," Drain said. "What's really in their control is dealing with the business plan and making sure the constituents are on board with this company. That is what I would want to see before approving significant amounts of bonuses."
Creditors also argued that approving the benchmarks in the KEIP for top employees would allow for Martin and Brace to seek approval of even larger payments for themselves.
"It's realistic to assume these people will have a form of short-term incentive,” Drain said. “The question is when and based on what metrics. And even if the metrics are appropriate, it doesn't happen until they deliver a business plan that the key constituents feel comfortable with. That's their job."
Martin said A&P was at work creating a short-term management incentive plan at the time the company filed for Chapter 11. The KEIP was crafted by A&P with input from consultant Towers Watson and the retailer's board of directors.
"Everybody works harder if they have a chance to earn more," Martin said. "It's not a guarantee, but it's an opportunity which inspires people. And I think it's human nature. From my personal point of view, if I have an opportunity to earn more, I will work harder to get it."
Martin said the challenge of running the company while simultaneously fixing it made time of the essence, arguing that a near-term incentive plan was therefore appropriate. He also noted the company has lost 18 executives since filing Chapter 11, straining A&P's resources.
"We not only have to run the company as a business, but we have to improve it and change it, and make it better. And turn around the trends that have been at least three years in decline," he said. "And we need to do this immediately and start an upward trajectory if we have any hope of getting a turnaround to be successful."
Jose Tamez, managing partner in the Denver office of executive-recruitment firm Austin-Michael, told SN last week that it was likely the company and its stakeholders would eventually come to a compromise on executive compensation.
"It's certainly reasonable that union people would be bothered or upset that top management are getting performance bonuses while they are being asked to cut back," Tamez said. "But regardless of their circumstances, what A&P has done is recruit a good group of talented executives there. And you can't go out and get that type of talent without offering them a compensation package that's attractive and some sort of program to keep them there."