Pay Programs: Retailers need to be informed and be proactive

Brian Cumberland and Jon Goulding

5/9/2017

As retailers continue to navigate challenging conditions, they need to ensure their people strategies and pay programs are flexible and supportive, not ridged and dated. What follows are different approaches to working through some of the difficult, but necessary, steps to improving retail pay programs to fit the basic actions some retailers must now take.

Being Proactive Not Reactive

If a retailer is engaged in financial improvement activities, pay programs should support these efforts. Retailers tend to pay bonuses deep into the organization, sometimes without necessarily differentiating rewards between roles, or among the best talent. As retailers reframe what growth and profitability are, the need for efficiency is key. Identifying important contributors, critical functional jobs related to merchandising and store planning and allocation and in some retail models jobs related to the digital platform may be imperative to the retailers changing channel strategies.

When retailers are trying to return to profitability there is usually an effort to uncover cost savings. The blunt instrument for cutting costs is generally store closings and workforce reductions. Store closings are a part of a broader dynamic, as store locations are affected by a range of variables. Workforce reductions may offer some cost savings in the compensation and benefit program. Some alternative cost reduction techniques to consider include:

- Careful management of merit pay

- A limited furlough program

- Benefit program restructuring and cost reduction or shifting

- Incentive programs that drive needed / timely performance

Of course, no one likes a pay or benefit reduction, but most workers prefer a job and will lend their discretionary efforts when they feel like the organization is taking care of them.

Getting Ahead of the Bankruptcy Process

Generally, an incentive plan with structured financial goals or objectives should be implemented as soon as possible to retain key talent for the future. Recent trends in bankruptcy cases indicate that using a pre-filing retention program in advance of the bankruptcy proceedings may have advantages over waiting to develop programs after the formal bankruptcy filing, in that:

1. Pre-filing programs may eliminate contested negotiations with the courts / creditors;

2. Proactive plans may focus employees who are contemplating leaving the company; and

3. The plan can be applied either more broadly or extremely focused across the organization.

As with all retention plans, retailers will need to consider the length of the retention period, the effect on employee pay expectations once the retention period ends and the overall retention award amount. Balancing those concepts effectively can help organizations better deal with employee attrition. Before a pre-filing retention bonus can be paid the Board of Directors will need market data to support any bonus payments or changes ahead of a restructuring.

Understanding How Bankruptcy Effects Employee Pay

In the event of a bankruptcy filing, the type and magnitude of the changes to the pay plans will be influenced by the anticipated time frame for recovery after bankruptcy. No matter the type, or time frame for the bankruptcy, the bonus and long-term incentive programs will need to be modified.

During bankruptcy, pay programs may be modified as illustrated below:

KEIP-ing Executives Engaged in the Recovery Process

Companies under financial stress want to retain key executives so industry and company knowledge isn’t lost. On the other hand, valuable executives may be reluctant to remain on what may be perceived as a “sinking ship.”

Many companies today implement Key Employee Incentive Plans (“KEIPs”), which are performance-based incentive plans designed to fall outside of the bankruptcy code restrictions. KEIPs are generally reserved for a limited population of the company or those executives deemed “insiders.”

KEIP Considerations for Retail Companies

Companies should consider various factors when implementing a KEIP. The KEIP should use pay for performance guiding principles and not simply require continued employment. Consequently, KEIPs should be designed to motivate executives to deliver key organizational results. Common financial / non-financial goals used by retailers in bankruptcy include:

• Store closures or rent concessions;

• Other expense reductions such as inventory liquidation;

• Financial metrics (EBITDA, EBITDAR);

• Budget compliance;

• Confirmation of the reorganization/emergence from bankruptcy plan by a specified date; and/or

• Amount of proceeds realized from sale of company or designated assets.

Due to the high level of scrutiny bankruptcy organizations may face, it is critical to choose the right goal(s) as well as to calibrate performance goals so the plans are not perceived as “lay-ups.” Other considerations include the timing of the payments and the length of the performance periods.

Retail companies in an unhealthy financial condition are especially challenged with retaining and motivating key employees. Well thought out and implemented bonus programs can help bridge the pay gap as retailers work through financial issues. In implementing a KEIP, it is vital to structure the plan so it properly motivates critical achievements and tangible results. Accordingly, it is most advantageous to develop a bonus plan with KEIP-like features during the pre-filing period. It’s best to have an early bird mindset when approaching pay related concerns.

When a company’s financial health is not optimal, a general practitioner may not have the required expertise to guide the company through these issues during the recovery period, so retaining a qualified specialist is critical. A properly developed executive pay program is one of the most important levers in a restructuring.

Brian Cumberland is a managing director with Alvarez & Marsal in Dallas, where he leads the firm’s executive compensation & benefits practice. Jon Goulding is a managing director and co-head for the West Region with Alvarez & Marsal's North American commercial restructuring practice in Los Angeles.

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