Bankruptcy judge approves $14M Toys R Us executive bonus payout

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Mattel said the Toys R Us bankruptcy was a factor in the company’s quarter results and Mattel’s sales have fallen 13 percent since last year. NorthJersey.com

BERGEN COUNTY, N.J. — The judge overseeing the Toys R Us bankruptcy case ruled Tuesday that the insolvent retailer can pay its 17 top executives $14 million in incentive bonuses.

Toys R Us, which is based in Wayne, N.J., agreed to trim its original $16 million bonus proposal by $2 million, and to make $5 million of the bonus payout contingent on the company creating a business plan that allows it to emerge from bankruptcy.

The company said the bonuses are necessary because they motivate executives to boost sales during the critical holiday shopping season. 

Bankruptcy Judge Keith Phillips overruled objections by the U.S. Trustee’s office, which serves as a public watchdog in bankruptcy cases, that executives at Toys R Us are already highly paid compared to other retail leaders, and that they also receive lavish perks, such as cars and drivers and private airplane trips.

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Phillips made his decision following a five-hour hearing in his courtroom in Richmond, Va. He said it was “particularly striking” that none of the creditors or lenders whom Toys R Us owes money objected to the plan.

“On the contrary, I see the committee and any creditors who have addressed this court are asking the court to approve this plan and I think that’s telling,” Phillips said. Toys R Us answered the concerns of creditors and the court by amending the original plan, he said.

The plan, he ruled, represents sound business judgement and is “fair and reasonable under the circumstances.”

Lack of oversight charged

Lynn Kohen of the U.S. Trustee’s office argued that Toys R Us, in effect, was asking for “carte blanche discretion” to pay bonuses to its top executives, with little oversight by the court or its creditors.

Toys R Us, she contended, uses adjusted earnings as its benchmark for whether executives have earned bonuses, and can shift that benchmark at its own discretion.

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Under the revised bonus plan, Toys R Us must achieve adjusted earnings of at least $484 million before any bonuses are paid, and reach $550 million to trigger the full $14 million payout. If adjusted earnings for fiscal 2017 exceed $550 million, those bonuses could be greater than $14 million, but attorneys for Toys R Us said it was extremely unlikely that the company would exceed the $550 million goal.

Kohen argued, however, that Toys R Us seems to have been able to adjust its earnings in the past to meet its bonus target goal.

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Toys ‘R’ Us may file for bankruptcy as early as this week. The toy retailer which has multiple stores around the country has struggled to continue growing its business. Wochit

‘With a blindfold’

Joshua Sussberg, an attorney for Toys R Us, said the bonus plan requires the executives to meet difficult financial goals. “These are not layups,” Sussberg said. “These are not three-point shots,” he said. “These are half-court, backwards, with a blindfold.”

Kenneth Eckstein, the attorney for the committee representing unsecured creditors, said the committee is rooting for Toys R Us to do well enough this year to trigger the full bonuses because “it means the company is on the right track.”

“Frankly, we will be disappointed if no bonus payments are made,” he said.

During the hearing, Kohen grilled Brian Cumberland, a financial adviser whom Toys R Us hired to review its executive compensation and bonus plans, about pay and perks for the company’s chief executive, Dave Brandon. Cumberland, who reviewed the compensation rates for retail chief executives for comparison purposes, acknowledged that Brandon’s cash compensation of $6.5 million was the highest of the group. Brandon receives other long-term incentives and bonuses that bring his annual compensation to $12.5 million.

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Kohen also asked if the bonus analysis took into consideration that Brandon was reimbursed for the use of a private plane. Cumberland said perks were not considered.

A spokeswoman for Toys R Us, Amy Von Walter, said Brandon’s employment agreement “includes use of a charter jet service for business travel, which is a common practice for CEOs of large, privately-held companies.”

Kohen stated that perks and other payments were relevant because Cumberland and Toys R Us “are saying to the court that these people are underpaid,” while she is trying to demonstrate that “these people are getting a lot of money in different forms.”

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Bonus culture

Annual bonuses for executives and managers are part of the corporate culture at Toys R Us, with bonus checks typically handed out in the spring, after the results are in for the crucial fourth-quarter holiday season. Attorneys for Toys R Us told the bankruptcy court that the bonuses are needed to motivate top employees to work hard to emerge from bankruptcy and transform the company.

Sussberg said in his opening statement on behalf of Toys R Us that it was important to have the bonus question decided quickly so the company can remain “laser-focused on the holidays.”

“We’re hopeful that everyone will get out there and shop at Toys R Us and buy as many toys as they possibly can and help this company move forward,” he said.

But Kohen, of the U.S. Trustee’s office, said that the company’s acknowledgement that it will be a challenge to meet the financial benchmarks for the bonuses is an indication that the company is in serious financial trouble.

“I think there’s real fear here that the debtors are not going to survive after this Christmas,” she said.

Follow Joan Verdon on Twitter: @JoanVerdon

 

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