Sears and Kmart workers still have no idea whether they’ll have a job after the holidays, as the once-mighty retailer slogs through bankruptcy. But the federal bankruptcy court working through the case has nonetheless delivered a Christmas miracle for one important constituency: the company’s executives.
Late on Friday, U.S. Bankruptcy Court Judge Robert Drain approved $25 million in year-end bonuses for Sears’ top managers, as the company had requested. Nineteen executives would get about one-third of that money, around $8.4 million, if Sears hits certain financial targets in the next six months, or even if it merely pronounces itself on track to reach those goals. Another $16.9 million would be distributed to 315 senior employees in “retention bonuses,” so they don’t leave to join other retailers.
That comes to less than one-half of one percent of the more than 60,000 current employees at Sears who have seen the company capsize, after a doomed, debt-fueled strategy of financial engineering that transferred wealth-generating productivity from workers into the hands of financiers and investors.
The future of those toiling at the remaining locations remains in limbo, while hundreds of thousands of Sears and Kmart employees have already seen their stores shut down. Many of those let go report difficulty in receiving severance pay. Yet executives have now received a rubber stamp to collect a bonus that most people would assume only accompanies a job well done.
This is definitely a situation where the scandal is what’s legal. It’s common for executives to get bonuses approved during bankruptcy proceedings. The same thing happened at Toys “R” Us, before the company was liquidated. “It’s an example of how our bankruptcy laws are broken,” said Carrie Gleason, policy director and campaign manager of the Rise Up Retail campaign, which has assisted current and former Sears workers.
But the decision from Judge Drain comes just a week after U.S. bankruptcy trustee William Harrington, responsible for overseeing the Sears case on behalf of the government, formally objected to Sears’ proposal to pay out the bonuses. Harrington wrote that the idea of enriching a tiny elite at the top of Sears’ organization while the rest of the company scrambles would be improper.
“Against the backdrop of running going out of business sales, the shuttering of hundreds of stores, and the presumed termination of thousands of rank-and-file and hourly employees,” Harrington argued, “the Debtors are seeking authority to pay significant bonuses to their most senior executive officers … many of whom received pay raises on the eve of the bankruptcy filing.” Viewed this way, the bonuses do not feel like an effort to retain top talent through a difficult period, but a final extraction of cash before the ship sinks.
The aforementioned clearance sales perversely increased same-store revenues in the last quarter. Employees “are literally working themselves out of jobs” by selling off the inventory, in the words of Harrington. Meanwhile, since the liquidations are increasing sales, top executives with bonuses tied to performance could earn more money for effectively putting workers out on the street.
“It's a complete slap in the face,” said Gleason. “You give people who drove the company into the ground millions more while denying hardworking Sears and Kmart workers their severance pay?”
Eddie Lampert, the hedge fund tycoon who through a series of transactions simultaneously served as Sears’ chairman, landlord, and chief creditor, has offered to buy Sears for $4.6 billion. He claimed this would keep around 500 stores open and 50,000 workers in their jobs. A $350 million loan from Cyrus Capital Partners, another hedge fund, kept Sears afloat for the holidays. Cyrus would partner with Lampert if the purchase goes through. But some creditors have argued that Sears would be worth more liquidated.
There’s some question as to whether even liquidation would work. On Tuesday, the bankruptcy court was supposed to auction off Sears’ Home Services division, with 5,000 additional jobs at stake. But it only received one bid, from Service.com, and subsequently canceled the auction.
Workers have organized for a voice in the bankruptcy process. Their demands include protecting the jobs left, securing severance pay for those laid off, and preserving worker pensions. “This is part of a bigger movement of families that are really angry,” said Gleason. “The rules are not set up to protect their families and the rules have to change.” A similar coalition finally got the private-equity firms that controlled Toys “R” Us to commit to a $20 million severance fund, a fraction of what workers there said they were owed.
The situations at Toys “R” Us and Sears share many parallels, of which payouts of executive bonuses while the companies faced dissolution are only the latest. Both companies’ fates owed more to the private-equity model of loading on debt and squeezing labor than to competition from e-commerce rivals like Amazon. The precariousness of the debt model made it impossible for the companies to adapt to the changing climate of retail.
A different business strategy could have given both chains the strength to survive, but as we’ve seen throughout retail, the private-equity model is far too prone to failure. Half of the ten biggest private-equity acquisitions in retail since 2002 are either in Chapter 11 or so financially distressed that they’re heading down that road. The same track record holds for grocery stores, as a Prospect investigation this fall showed.
In other words, bonus handouts to the executives at a failing company are a symptom of a larger catastrophe, where financial engineering sucks the value out of once-durable brands, with front-line workers bearing the brunt of the pain.
“What ultimately needs to happen is that Eddie Lampert needs to be held accountable for what he’s done to one of the most important companies in America,” said Gleason. “Nobody thinks what he’s been able to get away with should be legal.”