Of Layoffs, Bankruptcy and Bonuses

By DAVID CARR
http://www.nytimes.com

Let’s say that a group of corporate executives uses scads of debt to take over a struggling company, sells off some profitable assets, lays off thousands of employees while achieving miserable results. And then, less than a year after saddling the company with $8 billion in debt, they opt for bankruptcy.

You’d expect them to walk the plank, or at the very least, spend a good stretch of time in the naughty corner. But you wouldn’t expect the top 700 managers to collect $66 million in bonuses.

But that’s just what might happen at the Tribune Company. A week ago Friday, lawyers for the company, which publishes The Los Angeles Times, The Chicago Tribune, The Baltimore Sun, and owns other newspapers and television stations, were in Federal Bankruptcy Court in Delaware suggesting that the proposed 2009 bonuses were critical for the health and survival of the company.

Under questioning, Chandler Bigelow III, the chief financial officer, said the bonuses would help “incentivize our key managers to battle all of the intense challenges that unfortunately our local media businesses are facing,” according to The Associated Press.

The unsecured creditors of the Tribune Company filed a letter in support of the incentives, and its senior lenders support the plan as well.

But both the company’s union and the trustee appointed to oversee the bankruptcy raised objections, arguing that the bonuses would be the highest ever paid — even as the company has its lowest cash flow in 10 years.

“It is sort of along the same lines as the Bank of America and A.I.G. bonuses, except it is not taxpayer money,” said Cet Parks, executive director of the Baltimore-Washington Newspaper Guild, in an interview. “At the same time they are asking employees to make sacrifices, they want to reap the rewards of all these cuts they have been making.”

As it turns out, Sam Zell, the real estate mogul known as the grave dancer for his willingness to take on distressed assets, seems more like a grave digger. There is litany of infamies surrounding Mr. Zell’s ill-advised employee stock ownership plan in 2007 to take over the Tribune: its original creditors are currently investigating whether the sale qualified as a so-called fraudulent conveyance; cash flow fell to $789 million last year, from $1.5 billion in 2006; the costs associated with bankruptcy are now more than $7 million a month; and about 2,000 people lost their jobs in 2008 alone.

But the bonuses at issue in the court in Delaware offer a nice window into the entitlement and tone-deafness that has prevailed at the company better than any of those other big numbers.

The proposed bonuses come in two gilded packages. The annual management incentive program would pay more than $45 million to about 720 managers along a sliding scale based on achieving certain targets. About $11.6 million would go to 70 core managers and other personnel, with $9.3 million reserved for just 23 employees in a pay-for-performance arrangement.

If all of the maximum performance standards were met, about $66 million would be paid out, far more than bonuses paid in the past, at a time when total revenue declined by $800 million.

At a hearing on the bonuses, a union accountant testified that if the maximum incentives were paid, they would eat up 15.5 percent of operating cash flow.

The bonus plan, which is an effort to replace awards of equity given to managers in the past, was announced in February, just about the time that the company was issuing memos about wage freezes and “shared sacrifice.”

At a hearing in May on the previous year’s bonuses, which the bankruptcy judge granted, Mr. Bigelow said, “I will tell you that not being rewarded for hard work and hard effort is demotivating.”

Steve Lopez, a columnist for The Los Angeles Times, knows the feeling.
“We’ve got empty desks throughout the newsroom. Working journalists used to sit at them and serve up good stuff daily. Then there’s the issue of our bankruptcy,” he wrote in an e-mail message, adding, “Yeah, I’d have to say the brain trust was tone-deaf, to say the least, in handing out bonuses to the big dogs.”

In their motion in support of the plan, the Tribune’s lawyers said, “the debtors’ need to maintain these incentives for 2009 remains as strong as ever, as its key personnel are still being called upon to surmount significant industry and macroeconomic challenges while at the same time working diligently toward a successful reorganization.”

A company spokesman added that in spite of opposition from the unions and the trustee, “both our senior lender steering committee and the unsecured creditors committee support this plan as in the best interests of the future of the company.”

Joseph J. McMahon Jr., the acting trustee for the Tribune bankruptcy, does not agree and filed an objection to the plan on Aug. 4, writing that the threshold for such payments was high, and he cited relevant case law requiring that the bonuses had to be “essential to retention of the person because the individual has a bona fide job offer from another business at the same or greater rate of compensation.”

He had questions about the targets at the basis of the payments, saying “the debtors do not give any factual and/or historical context to back up their characterization of that performance target as ‘real.’ ”

Union lawyers called the targets that would enact the payments “a layup,” while Mr. Bigelow rejected claims that the target was set too low. “The plan was developed in good faith, with integrity,” he said.

All this requires what we in the journalism business call a to-be-sure moment. A company spokesman reminded me that with the coming $740 million sale of the Cubs, the company will have $1.5 billion in cash on hand, so while the company may be bankrupt, it’s not broke. And let’s stipulate that many of the men and women at the Tribune are working hard to lift it out of bankruptcy, keep its newspapers intact and serve their communities. They are not traders in obscure financial instruments that tipped over the markets and are now lining up at the trough.

But at a bankrupt company in a declining industry with negative performance, is it really time for the bankruptcy court to open up the wallet?

The chief judge, Kevin J. Carey, who is presiding over the bankruptcy case, said that a company fighting for its life needed top-tier talent, but also said, “in a troubled industry as this one, the argument could be made that bonuses should not be paid, or certainly not of this magnitude.” He will make a decision soon, perhaps in the coming weeks.

But regardless of whether the bonuses have been earned or not, James Warren, a former managing editor of The Chicago Tribune, wonders how necessary they are.

“Without denying that many of these folks are toiling hard and diligently, the basic arguments underlying this request are laughable and beg at least one simple question,” he said. “How many of those that are being enriched by the bonuses have been contacted by headhunting firms seeking their talents? After what has happened there and what is going on in the broader economy, where are they going to go?”

E-mail: carr@nytimes.com; http://twitter.com/carr2n