Key Employee Retention under BAPCPA

Background: Pre-Act Use of KERPs

Prior to the Act, KERPs were used routinely by debtors in Chapter 11 cases in an effort to retain key employees, principally senior management, who might otherwise seek employment at another, more financially stable, company. Underlying the widespread use of KERPs was the premise that the retention of knowledgeable and experienced personnel, particularly at senior levels, is often critical to enabling a troubled company to reorganize successfully, ultimately maximizing value to creditors. Although compensation packages varied from case to case depending on the debtor's needs, typical components of a KERP included: performance-based incentive bonuses; retention bonuses; success bonuses upon meeting bankruptcy benchmarks; discretionary bonuses for rank and file employees; severance benefits; and assumption of existing employment or severance agreements. Because no Bankruptcy Code provision specifically addressed KERPs, bankruptcy courts considered whether to approve a KERP against the standards for non-ordinary course use of property of the estate under ” 105(a), 363(b) and 365(a) of the Bankruptcy Code: whether the program was fair and reasonable and within the debtor's sound business judgment. This standard afforded a debtor substantial flexibility in formulating a KERP.