Assessing the New Hertz Bonus Plan

Said Luke Skywalker inside the trash compactor about to be crushed: “One thing's for sure, we're all gonna be a lot thinner.” The situation and quote are apropos for what businesses are going through as part of the economic fallout from the coronavirus pandemic. 

Hertz — which shed over half its global workforce and declared bankruptcy in the span of two months — has had to make the toughest decisions this year than in the company’s 102-year history. 

Deep cost cutting produces hard choices to balance business survival with do-the-right-thing decency. Do you offer a financial lifeline to those let go, or come up with financial incentives to motivate remaining key personnel to execute on the new strategy? Is there a middle ground of fairness that balances those needs? Talk about a trash compactor conundrum.

This is exactly what Hertz is wrestling with right now. Hertz has floated a compensation plan to reward executives with up to $14.6 million in bonuses this year, a plan that was initially not well received in bankruptcy court, and out of it. 

During a phone hearing on Sept. 17, bankruptcy Judge Mary Walrath said “It seems offensive to give senior executives bonuses” when some 340 executives got bonus payments to the tune of $16.2 million immediately before Hertz headed to bankruptcy. 

Other objections include a group of retired Hertz executives, who say the bonuses jeopardize retirement commitments, and a bankruptcy trustee who says the plan does not follow the agreement made prior to the bankruptcy filing to waive Hertz’s original 2020 bonuses.

The judge did not allow the plan to go forward but would allow Hertz to amend and refile the petition with a better justification of the plan and a revision of the targets to get paid.

Under U.S. bankruptcy code, debtors can’t simply give a bonus to managers with the sole purpose to get them to stick around. However, bankruptcy code does allow debtors to create an incentive plan to reward employees for meeting performance goals, and that’s what Hertz proposed to the court. 

In an August 27 filing, Hertz laid out its Key Employee Incentive Plan (KEIP) for 14 executives and an Employee Incentive Plan for 291 more. The plan is based on operating cash flow, airport and off-airport revenue, fleet utilization, and ABS debt paydown through sale of vehicles. The plan sets out a scale of “threshold,” “target,” and “reach,” with payouts of 50%, 100%, and 125%, respectively, with adjustments based on factors such as enplanement fluctuations. 

The judgment period is July 1 to Dec. 31, 2020, except for fleet utilization, which is measured from Aug. 1 to Dec. 31. 

Hertz hired third-party consultants to show that similar incentive programs structured by peer group debtors were approved by bankruptcy courts. The filing claims those incentives were reasonable, and that Hertz executives’ compensation is far below market value.

If the plan were to be rejected, Hertz argues the competitiveness of its executive compensation structure would hinder the company’s ability to attract and retain talent and therefore jeopardize its goal of returning to financial solvency. 

Of course, if the goals aren’t met, then no one gets paid. However, how easy are those goals in reality? Are they achievable by merely punching the clock? Is the structure labeled below market value understanding that everything is now below market value during this pandemic? 

With so many external factors affecting the travel industry, any historical benchmarking is a twirling target. 

The plan was introduced when almost two months of the six-month period are already in the books; add another month while the process continues to play out. With half the period finished, are the stretch targets easily being met, or not at all? (As well, with so many factors affecting utilization that don’t necessarily drive overall profitability, is it a valid metric?)

It’d take a forensic accountant to get to the bottom of it all. There are no black-and-white answers. No one wins. But if they can’t replace or retain the intellectual knowledge that left the building — and lure then to Estero, Fla. — how will it survive? 

While the bankruptcy rules are written to prohibit an easy reward for the same executives who drove the company into bankruptcy, can you fault present management for past missteps? Hertz’s compounding debt slide began long ago, perhaps as far back as 2005 when private equity bought the company from Ford. 

But what isn’t mentioned in the bankruptcy document is the “rebalancing of pay” for everyone else at Hertz, the thousands of workers not labeled KEIP or KEP. Many of those workers — the frontline teams putting renters in cars — had some form of commission. Will the judge consider the pay of remaining employees before her final ruling on the compensation plan? 

They’re going to be vital in the rebuild too.