Dr. P.V. Viswanath
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|Borders Seeks to Pay $8.3m. in bonuses
WSJ, March 25, 2011 by Peg Brickley
Book retailer Borders Group Inc., which is shuttering hundreds of stores in a bid to stay alive, is seeking bankruptcy court approval to hand out as much as $8.3 million in executive bonuses, including nearly $1.7 million to President Mike Edwards.
Papers filed with the U.S. Bankruptcy Court in Manhattan outline a proposed bonus program that is keyed to the company either reorganizing under Chapter 11 or selling itself as a going concern. The bonus proposal is due for review April 14.
Mr. Edwards is also president and chief executive of Borders Inc., the principal unit of Borders Group. Bennett LeBow, chief executive of Borders Group Inc., isn't included in the bonus plan, which was outlined Thursday.
For Borders' five highest-level executives, the bonuses would mean extra pay of between 90% and 150% of their base salaries, depending on how quickly the company exits bankruptcy or is sold as a going concern.
Saddled with leases on big stores, Borders has said it will try to get out of bankruptcy by August or September. The Ann Arbor, Mich., company said the bonus program should help ensure that happens because rewards are linked to an "aggressive" time frame for exiting Chapter 11. The bonuses won't be paid if Borders liquidates.
Seventeen top executives are covered by the largest program, which could add as much as $7.1 million to the pay packets of leaders who stick with the company in bankruptcy.
Court papers say 70% of the group have been with the company less than 18 months, and many joined Borders less than a year ago.
A second $1.2 million bonus program covers 25 "director-level" managers "critical to the debtors' reorganization and to ongoing business," court papers say.
One veteran publishing executive whose company is an unsecured Borders creditor on Friday expressed frustration with the proposed bonuses but said that he felt the alternative would be even more expensive.
"The idea of retention bonuses are killing me, but you'd have to pay a king's ransom for the next group," said the executive. "It irks me because it's money that won't go to paying creditors."
He added, "I want to see Borders come out of this. If they don't have these guys, I don't see a chance."
A Border spokesman said the retailer "has asked the court to approve incentive and retention compensation plans to certain executives with respect to the Chapter 11 proceedings."
Borders has yet to file court reports that will spell out how much company insiders made in the year before the company's Feb. 16 bankruptcy filing.
Due to financial distress, the company decided not to pay bonuses for the 2010 period, Borders said in court papers. Additionally, the company said corporate employees haven't seen a salary raise in nearly four years. Mr. Edwards's predecessor as chief executive, Ron Marshall, collected about $806,000 in total pay for 2009, and more than $1 million for the previous year, SEC filings say.
Securities and Exchange Commission filings show that Mr. Edwards collected nearly $762,000 from the company in 2009, more than half of it in the form of stock and options. That was for services as chief merchandising officer, before he was named president and chief executive of Borders Inc. in January 2010.—Jeffrey A. Trachtenberg contributed to this article.
Questions (from the WSJ Finance Weekly Review):
The following description is taken in a slightly paraphrased form from Jonathan Berk and Peter DeMarzo's textbook, "Corporate Finance" 2nd edition, page 513:
When discussing corporate governance, we noted that it was the entirety of a corporation's organization and structure as well as the contracts, implied and explicit between the firm and its stakeholders and we suggested that the goal of the firm's governance structure was to maximize firm value, i.e. the sum of the values accruing to all its stakeholders. If this is true, then the choice of Chapter 7 or 11 in bankruptcy should be guided by which one maximizes firm value. The bankruptcy petition of Borders Group, Inc. in the United States Bankruptcy Court of the Southern District of New York, was filed on Feb. 16, 2011 by Scott Henry, the CFO of the Borders Group and is available online at http://www.bordersreorganization.com/pdflib/20_10614.pdf.
Read the introductory paragraphs 1-6 and specific portions of the General Background, viz. sections A-B and D-H (i.e. paragraphs 7-14 and 21-34 , which are to be found between pages 3 and 11, skipping section C) and section J ("Restructuring Goals" paragraphs 47-49, page 16). Then answer the following questions: