Big retailer’s alarming CEO pay package threatens bankruptcy exit

Major bankrupt retailer's lenders are demanding that its CEO reduce a $20 million "success fee."

Jun 9, 2024 - 18:30

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Big retailer’s alarming CEO pay package threatens bankruptcy exit

Distressed companies occasionally provide their employees with incentive bonuses to entice them to remain in their jobs while they navigate through their bankruptcy cases. Retention bonuses, however, are more restrictive, but allowed in some cases.

The Covid-19 pandemic led to thousands of bankruptcy filings since 2020, including 7,300 companies in fiscal year 2020 alone, according to a 2021 U.S. Government Accountability Office report. About 1% or 70 companies that year requested court approval to pay employee bonuses and courts approved most of the requests.

Bankrupt companies awarded $571 million in court-approved bonuses to over 16,600 executive and non-executive workers. However, none of the debtors in 2020 requested court approval for executive retention plans, though 57 requested non-executive retention plans and 47 requested incentive plans for executives that are not as restrictive.

Some companies that filed Chapter 11 bankruptcy in 2020, such as JC Penney (JCP) , Hertz (HTZ) and Chuck E. Cheese, didn't need to request retention bonuses after filing bankruptcy, since they already awarded retention bonuses shortly before filing, the GAO said. This process of awarding retention bonuses before filing was used by 42 companies that provided $165 million in such bonuses.

Executive compensation has become an issue on at least a couple of occasions in Rite Aid's Chapter 11 bankruptcy case. The debtor filed its petition on Oct. 15, 2023 and hired Jeff Stein as its chief executive officer and chief restructuring officer in a deal worked out prior to the filing, according to court papers.

Stein had quite an assignment to navigate the drugstore chain through its bankruptcy case, as it had about $4 billion of long-term debt obligations and was paying about $200 million in interest on its debt annually. The debtor seeks to reorganize its debts in bankruptcy and hand control over to its bondholders.

Since filing its petition, Stein has been busy closing 351 Rite Aid stores across the U.S., and most recently on June 6 filed a notice of additional closing stores to shut down locations in Sandusky and Swanton, Ohio.

Creditors object to Rite Aid CEO's compensation

Under the CEO's compensation agreement, Stein receives a $300,000 per month consulting fee and a $20 million "success fee" on emergence from Chapter 11, as described by Rite Aid's Official Committee of Tort Claimants in their April 15 objection to confirmation of the debtor's Chapter 11 reorganization plan. The combined compensation at emergence from bankruptcy was estimated at about $22 million, the Tort Claimants asserted in their objection.

The debtor's Official Committee of Unsecured Creditors joined the Tort Claimants in their objection.

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The Tort Claimants asserted in the objection that the $20 million "success fee" would be the same amount that all unsecured creditors would receive in total from their combined claims. The committee also asserted that the $20 million fee is four times greater than fees paid to CEOs in recent Chapter 11 cases of companies similar to Rite Aid.

The debtor's lenders are also concerned about the CEO's compensation. Parties that have committed to providing debtor-in-possession financing are reportedly demanding that Stein's compensation be reduced before they fund Rite Aid's exit from bankruptcy, Bloomberg reported.

Rite Aid and its creditors will need to reach an agreement pretty soon as Judge Michael B. Kaplan of U.S. Bankruptcy Court for the District of New Jersey on June 3 signed an order scheduling a hearing for June 27-28 for confirmation of the debtor's reorganization plan.