Toys 'R' Us Seeks to Pay $16 million in Bonuses to Top Executives

By Soma Biswas Features Dow Jones Newswires

Toys 'R' Us, which filed for bankruptcy in September, is seeking court approval to pay $16 million in bonuses to its senior leadership, including Chief Executive David Brandon.

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The company said in a bankruptcy court filing Tuesday it needs to pay the incentive bonuses to senior managers as the toy retailer gears up for its critical holiday season, where it generates 40% of its yearly net sales.

"The stress on the debtors' operations (and its senior management team) has been lasting and continues, as efforts continue to stabilize the world-wide enterprise and position the company to win during the all-important holiday season," said the company's lawyers at Kirkland & Ellis.

A group comprised of Vornado Realty Trust and private-equity firms KKR & Co. and Bain Capital bought the toy retailer for $6.6 billion in 2005. In addition to Mr. Brandon, who previously served at the helm of Domino's Pizza, another Bain-owned company, the bonuses cover 16 other top executives, including Kevin Macnab, president of Toys 'R' Us International and Carla Hassan, global chief marketing officer who joined in February.

The bonuses are tied to performance targets and milestones specified by lenders and payable if the company achieves earnings for 2017 at 30% below last year's level.

Toys 'R' Us had earnings of $117 million for the first half of fiscal 2017, a 41% year-over-year drop.

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Moreover, top brass would be in store for larger bonuses -- up to $32 million -- if the retailer hit an earnings target of $616 million, a scenario the retailer's lawyers described as "unlikely," according to the motion filed on Wednesday.

While incentive payments to top executives are legal, bankruptcy law prohibits bonuses to insiders if the goal is simply to keep them from leaving the company.

In recent years, key-employee retention plans, dubbed KERPs, have been largely supplanted by key-employee incentive plans, like Toys 'R' Us's, that tie bankruptcy bonuses to earnings targets or to postbankruptcy goals. Supporters say they are needed to keep the best executives from jumping ship when they are needed most.

Detractors say they are simply another way for top-level managers to enrich themselves. Since a 2005 change in bankruptcy law, critics argue, some corporations have circumvented the law by simply disguising retention plans as incentive plans.

A parallel compensation plan for non-insider employees calls for $45.8 million payments to 3,805 out of Toys' total 64,000 employees, including store managers, human resources, information technology and other types of professionals.

The non-insider employees' bonuses can go up to $68 million the so-called "stretch" level of Ebitda of $616 million for 2017, but that goal is seen as unlikely, according to the court documents.

Judge Keith L. Phillips will consider approval of the incentive bonus plan at a hearing set for Dec. 5 in U.S. Bankruptcy Court in Richmond, Va.

Write to Soma Biswas at soma.biswas@wsj.com

(END) Dow Jones Newswires

November 15, 2017 16:54 ET (21:54 GMT)