Restructuring Compensation Services - Bankruptcies, Reorganizations & Other Financially Distressed Transactions
At NFP Compensation Consulting (formerly Longnecker & Associates), we pride ourselves on being the foremost compensation experts in corporate restructurings, reorganizations, workouts, bankruptcies, insolvencies and other matters involving financially distressed transactions. With more than 70 years of leadership experience, NFPCC has successfully represented a range of clients spanning debtors, financial institutions, creditor committees, trustees, insolvency practitioners, and private equity and bondholders.
During times of financial turmoil, it is critical for the company’s best employees to be focused, motivated and rewarded through competitive defensible compensation programs compliant with bankruptcy code 503. In addition, we develop post-emergence plans and full compensation programs aimed at retaining and motivating the team to rebuild and generate significant shareholder value.
With extensive experience as corporate restructuring consultants for corporate executives and board members of public, private and not-for-profit organizations, NFPCC’s leadership is positioned to develop unique solutions and actively support our position in any venue. We develop programs aimed at solving a variety of issues:
- Retention of key talent in high-risk and/or volatile situations
- Incentivizing employees to achieve goals which are integral to successful emergence or maximization of asset sale proceeds
- Ensuring competitiveness of compensation values while accounting for time, risk and market conditions
- Fit within the cash flow requirement of the company
The U.S. Trustee almost always objects to a Debtor’s compensation programs. We stand beside our clients and defend our recommendations through transparent market information which provides justification through quantitative assessments on an individualized basis. Our experience as expert witnesses in hundreds of litigation matters and bankruptcy trials distinguishes us from other consulting firms, and we excel at collaboratively working with legal and finance teams to strategize on all reorganization matters and position you for success.
Without the knowledge of these processes and compensation best practices in restructuring situations, the chances of successfully achieving program goals are diminished. Properly establishing these programs requires significant thought and care. Restructuring situations are often public, fluid and complex. As such, it is important that the compensation programs account for these factors to ensure:
- Retention and motivation through the preservation of competitive levels of compensation
- Gaining approval of programs at the Board, U.S. Trustee, creditors committee and bankruptcy court levels
- Protection of the reputational capital of executives and independent directors
Maximization of the value proposition for new shareholders in a post-emergence environment
Corporate Restructuring Services
- Key Employee Retention Plan Design (KERP)
- Key Employee Incentive Plan Design (KEIP)
- Management Incentive Plan Design (MIP)
- Severance/Change-in-Control/Employment Agreements
- Board of Director Compensation
- Post-Emergence Equity Structures
- Full Post-Emergence Compensation Plan Design
- Competitive Compensation Assessment
- Milestone/Hurdle Incentive Plans
- Reasonableness Opinions
- Handcuff Analysis
- Working with the CRO
- Testimony Regarding Findings
- Litigation Expert Witness Services and Testimony »
- Mergers and Acquisitions »
- 280g Analysis »
Compensation programs in restructuring scenarios are drastically different than “normal course” and require greater care to ensure viability and reasonableness is achieved. This is magnified when it comes to compensation for “insiders”, which is one of the most hotly contested items in the restructuring process.
The utilization of a KERP has evolved significantly over the past 5 years. Although the post-filing KERP remains prevalent, many organizations are seeing the benefit of pre-petition KERPs as a means of achieving greater flexibility in design.
• Participation level;
• Participation type;
• Total value consideration relative to normal annual compensation levels;
• Anticipated restructuring length;
• Current state of the macro and industry-specific markets; and
• Timing to filing.
KERP Case Study
In 2019, NFPCC was engaged by a private exploration and production company to enhance the current retention program that was put in place two years prior to considering a restructure. The phantom equity values proved worthless and voluntary terminations rose significantly. The existing retention program was deemed to be ineffective and required significant re-design in order to stem the flow of attrition and focus employees on operating the business up to and through restructuring.
NFPCC approached this situation by instituting a pre-petition KERP which was paid 100% up-front in order to mitigate bankruptcy court influence on the program. These payments were subject to a 12-month clawback for voluntary terminations, thereby requiring a full year of service and enhancing the retention of talent.
The value of the retention program was based on market competitive values inclusive of certain adjustments to account for both compressed time horizons for value realizations and lower risk of forfeiture associated with guaranteed payments versus incentive-based compensation opportunity. The outcome of this program has resulted in zero voluntary terminations since implementation.
The utilization of a KEIP is most typically reserved for executives or defined insiders in a bankruptcy setting. These programs are usually designed to comply with 503(c) provisions and generate payouts based on the achievement of pre-defined quantitative goals.
- Participation level;
- Total incentive target determination;
- Metrics/goal type;
- Ability to project goals on quarterly basis; and
- Scalability and payout potential.
KEIP Case Study
In 2017, NFPCC was engaged by a large public utilities company to develop a blended KEIP and retention
program aimed at working employees toward a 363 asset sale transaction. The company entered Chapter 11, thereby requiring the use of a 503(c) compliant plan.
NFPCC approached this situation by instituting a metric-based incentive program tied to the achievement of quarterly EBITDA and overall sale proceeds. In addition, non-Insiders were provided a retention program which included a performance hurdle. The creditors committee and U.S. Trustee both objected to the plan as providing unreasonable compensation levels relative to the established goals.
NFPCC served as the expert in defense of the objections and ultimately the court approved the programs. The company subsequently succeeded in the asset sale, over-achieving the targeted sales proceeds goal. Executives and employees were paid their incentives and marginal voluntary turnover occurred over the period.
Upon entering Chapter 11, the equity value of executives and employees of the Debtor is eliminated, oftentimes resulting in millions of dollars of lost wealth. In addition, when no equity is held by employees of the company, no executive-shareholder alignment exists, creating potentially hazardous situations for new investors.
MIPs are intended to solve this problem by creating an incentive pool to retain and motivate human capital upon successful emergence. Companies will carve out a certain percentage of the shares outstanding in the new entity for issuance to management, employees and/or the board. MIP awards enhance alignment of all stakeholder interests and incentivize the workforce to build long-term value.
- Participation level;
- Total dilution to new shareholders;
- Initial MIP allocation; and
- Vehicles and associated vesting schedules.
MIP Case Study
In 2019, NFPCC was engaged by a public exploration and production company to develop a Management Incentive Plan. Leading up to 2018, many energy industry bankruptcies had come and gone. MIPs established during this time were thought to have set the benchmark for future MIPs. It was quickly determined that was not the case. New investors were displeased with historical MIPs in what they perceived to be an already over-paid industry, believing too much value was transferred to management teams historically.
In reaction, 2018 and 2019 witnessed many MIPs come in with much lower dilution, in many cases half of pre-2018 pool allocations (there was a wave of 5% MIPs following the majority 10%). This created concern for the client, as NFPCC described the significant issues companies with low MIP pools faced upon emergence.
NFPCC worked with the company to establish the MIP pool and initial allocations as beginning points for negotiating a stronger MIP. As expected, new shareholders pushed back. NFPCC was engaged in discussions with these shareholders where the detrimental impacts of a low MIP pool were explained. After extensive negotiations, shareholders increased the percentage allocation by 4%, providing greater flexibility to the company in both delivery of initial shares, as well as future award opportunity.
Severance considerations, as well as the development of new agreements containing competitive change-in-control language, are always hot topics post-petition and often negotiating points with new shareholders. NFPCC is experienced in providing guidance related not only to publicly-disclosed information for senior management but also non-public information impacting the broader organization.
- Total plan cost;
- Payout opportunities under different termination scenarios;
- Severance calculation methodologies; and
- Minimum and maximum payouts associated with employee levels.
NFPCC has observed a growing trend among recently emerged companies whereby executives receive lower severance and CIC multiples compared to companies that have not experienced a restructuring event. This is indicative of a desire to limit compensation opportunity to management teams that have the perception of diminishing shareholder value, regardless of the reality. Further, this runs counter to the notion that higher CIC multiples for executives will better align them with shareholders in a M&A transaction.
Severance/CIC/Employment Case Study
In 2020, NFPCC was engaged by a public energy company to review its severance program, which was deemed by creditors to be overly generous to all employees. Upon review of the program, NFPCC determined the calculation, payout minimums and payout maximums were each higher than market, and were generating a total plan cost greater than market.
Working with legal counsel and financial advisors, NFPCC presented an alternative severance program design to both the company and the Board in an effort to re-align the program to normal market levels on a go-forward basis. The intention of the redesign was to limit the perception of overly rich programs and improve the reaction of creditors to the KERP being presented.
Presently, NFPCC is awaiting feedback on the outcome of this effort.
Director Compensation Plans
The compensation of independent directors in restructuring situations will vary greatly from the normal course, due to the elimination of equity value. Most directors know that despite a ramp up in their time commitments to the affairs of the company, they are likely working themselves out of their board role as they guide the restructuring process. Boards will generally be paid quarterly, creating potential unsecured creditor situations if payments are not current at time of filing. Redesign in restructuring is a normal occurrence.
- Total value of compensation relative to normal course;
- Meeting fees or not; and
- Timing of payments.
Director Compensation Case Study
In 2019, NFPCC was engaged by a public energy services company to redevelop the director compensation program. There was concern related to the amount of hours being worked and the possibility of not being paid once filing occurred. In this particular instance, none of the directors had experienced a restructuring event and lacked an understanding of the nuances and importance of changing the program.
NFPCC moved the directors to a monthly compensation program that included an enhanced annual retainer and meeting fees that triggered once a meeting threshold was passed. The enhanced retainer was intended to offset a portion of the annual equity award that would no longer be a part of the compensation program.
The program was adopted and utilized until filing.
Contact Our Corporate Restructuring Consulting Firm
Our restructuring consultants are headquartered in Houston, Texas. Get in touch with our team of corporate restructuring experts to schedule an appointment and learn how we can help you.