Circuit City seeks bonuses

Feb 11, 2009 (Richmond Times-Dispatch - McClatchy-Tribune Information Services via COMTEX) -- CCTYQ | Quote | Chart | News | PowerRating -- Circuit City Stores Inc. is asking a bankruptcy judge for permission to pay up to $4.65 million in retention bonuses to some of its employees to keep them as the Henrico County-based chain winds down its business affairs.

In all, 153 employees would be eligible to divide up to $3.9 million, while an undetermined number of nonmanagers could share up to $750,000.

Sixteen top-level executives, including James A. Marcum, the chain's vice chairman and acting CEO and president, and Reginald D. Hedgebeth, its senior vice president and general counsel, would split $2.3 million among themselves.

The remaining 137 employees are middle managers who would divide up to $1.6 million.

A bankruptcy court judge would have to approve the motion at a hearing Feb. 25.

The money would come in the form of bonuses that the executives and managers would split based on achieving specific targets, including closing distribution centers or the corporate headquarters building by certain dates.

Each target has a time frame, so the quicker a task is completed, the higher the bonus. For instance, the group would receive a 100 percent bonus if it completes closing the main corporate headquarters building on Mayland Drive by Feb. 28. They would get 50 percent of the bonus if the building closes by the end of March, court papers show.

In court filings, Circuit City said it has "experienced a noticeable increase in employee turnover" since announcing last month that it was liquidating. "The turnover threatens the debtors' ability to implement the wind-down plan and maximize value for their estates and stakeholders."

Robert Lawless, a law professor specializing in bankruptcy at the University of Illinois, said asking for money is not unusual as a company tries to get as much as it can from its assets.

"It makes a lot of sense to pay an incentive to employees to increase the recovery," he said. "For example, it gives incentives for the early closing of distribution centers, which cuts down on administrative costs."

Circuit City creditors likely will stand behind the plan because the current management could maximize the return and, in turn, how much creditors get paid, he said.

"This is the creditors' money right now," Lawless said.

In fact, many companies pay these types of bonuses to keep managers and executives who know how to run the company, experts say.

"It is not uncommon to put a package together with bonuses to maintain executives, because such positions cannot easily be filled on a temporary basis nor outsourced to another firm," said Tom Arnold, a professor of finance at the University of Richmond's Robins School of Business.

Given the number of layoffs at Circuit City, he said, the judge could allow the company to pay the bonuses but cut the amount. About 34,000 Circuit City employees in the United States will lose jobs because of the liquidation, which began Jan. 17.

The company filed for bankruptcy Nov. 10.

Seeking the retention bonuses comes less than two months after Circuit City voided the severance and employment contracts of 40 executives.

The chain won the right to void the $1.8 million in severance and employment contracts.

At the time, Circuit City asked a judge to cancel the contracts, which it said in court papers were financially burdensome and unnecessary.

One employee who was laid off in November, days before the bankruptcy filing, said she understood why the money is being offered but wished it was going to the rank and file.

"The thing that bothers me is that more of this should be going to the people in the trenches who are staying until the bitter end," said Cheryl Smith, who worked on the chain's Web site.

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Contact Louis Llovio at (804) 649-6348 or LLLovio@timesdispatch.com.

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