A U.S. Bankruptcy Court judge signed off Friday on Sears’ request to pay up to $25.3 million in bonuses to top executives and other high-ranking employees even as the company reported losing nearly $1.9 billion in the first three quarters this year.
Sears Holdings Corp., which filed for bankruptcy protection in October, said it needs to able to offer the extra cash to encourage key employees to stick with the company as it attempts to restructure, according to court filings.
The company’s proposal offers bonuses totaling up to $8.4 million to 19 executives if the company achieves certain financial targets over the next six months. Those employees also would be eligible for bonuses if the company is on track to hit those targets when it’s sold, an attorney for Sears said at the hearing.
The retailer also got permission to set aside up to $16.9 million in retention bonuses for a separate group of 315 senior employees. Each could receive a cash award equivalent to 30 to 40 percent of his or her salary, split into quarterly payments over the next year.
Since filing for bankruptcy, the company already raised base salaries for certain executives, including three tapped to form the Office of the Chief Executive after former CEO Edward Lampert stepped down. Lampert remains the company’s chairman, and his hedge fund, ESL Investments, has offered to buy many of the retailer’s remaining assets for $4.6 billion.
“Under these circumstances, it would be understandable if many key employees are asking themselves whether they should be seeking other opportunities,” Sears said in a court filing last month. However, the retailer “cannot afford this uncertainty – however understandable it may be,” according to the filing.
The company has already “suffered significant employee attrition” in the past month, including the departure of the chief operating officer of its Sears Home Services business and five other employees who would have been eligible for bonuses, Sears said in a separate court filing this week.
Bonuses at companies in bankruptcy are getting more scrutiny than in years past due to concerns about executives receiving extra compensation for just for doing their jobs at the expense of a company’s unsecured creditors, said Craig Barbarosh, a partner at law firm Katten Muchin Rosenman.
But as long as a company can show it has a good reason for incentives and is at risk of losing key employees, “it’s become fairly typical,” he said.
At a Friday hearing in the U.S. Bankruptcy Court for the Southern District of New York, Judge Robert Drain said he believed the targets Sears set for earning the bonuses were “not a layup.”
Just one day prior, Sears reported racking up nearly $1.9 billion in losses during the nine months ending Nov. 3. More than half of those losses came during the final three months, during which Sears filed for bankruptcy protection, according to a quarterly financial report filed Thursday.
The company did report a 4.3 percent rise in sales during the last quarter at its Sears and Kmart stores that had been open at least a year.
But even that apparently positive sign was “driven by liquidation sales in the stores that were announced for closure,” Sears said in a regulatory filing.
Related video: Eddie Lampert bids $4.6 billion for Sears (provided by Reuters)