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Toys R Us' $90M Worker Incentive Plan Gets Judge's OK

Bankrupt Toys R Us on Tuesday was given the green light to spend $90 million on an incentive package to motivate employees during the critical holiday season after a Virginia bankruptcy court overruled the federal bankruptcy watchdog's concerns that the "princely sum ... defies logic and wisdom."

U.S. Bankruptcy Judge Keith L. Phillips approved the two incentive programs that make up the package over the U.S. trustee's objections. One incentive program will reward a handful of top executives with $21 million if certain targets are met, while another will pay out $69 million to roughly 64,000 lower-ranking employees if the same targets are met.

The official committee of unsecured creditors initially objected to the senior executive incentive plan, or SEIP, which was originally capped at $32 million. The committee agreed to support it after the debtors consented to shaving off $11 million the top and making $5 million of the $21 million only payable after a successful emergence from bankruptcy, among other conditions.

The U.S. trustee did not drop its own objections before Tuesday's contested hearing, saying the SEIP's "princely compensation ... defies logic and wisdom, not to mention the Bankruptcy Code."

In a brief filed Monday, Toys R Us urged the court to approve the motion following the deal with unsecured creditors, an argument Judge Phillips appears to have heeded.

"The lack of any creditors objecting to the incentive compensation programs is a powerful indicator that its structure is incentivizing, because it is funded from their potential recoveries," the debtor said in its brief. "Only the United States trustee questions the notion that pushing the team to increase earnings enhances estate value."

Toys R Us declined to comment on Wednesday.

The New Jersey-based toy chain and owner of Babies R Us filed for Chapter 11 protection in September with more than $5 billion in funded debt, stemming in large part from money its owners borrowed in 2005 to fund a $6.6 billion leveraged buyout of the company and take it private.

In its original motion, filed late last month, the debtor said the package was necessary to keep the company on track during what has always been its most lucrative sales period of the year, when 40 percent of its annual revenue is made.

"Now more than ever the senior management team must be properly motivated and incentivized to handle the panoply of responsibilities attendant to their two full-time jobs of leading the debtors through this restructuring and, at the same time, implementing a worldwide strategy to increase sales following a near shut-down of operations just eight short weeks ago," the debtor wrote. "The task at hand cannot be underestimated."

The SEIP will pay out the full $21 million to the debtor's top brass if Toys R Us hits $642 million in earnings before interest, taxes, depreciation and amortization by the end of the fourth quarter. That figure was raised from $616 million at the unsecured creditors' behest, but it's unclear if the $69 million program will use the old target or the new one.

The debtors have said the $642 million target will be "effectively impossible" to reach, but the SEIP will still pay out $14 million if the debtor hits a $550 million target, and the other program will pay out $58.5 million at that level as well.

Among other things, the U.S. trustee said the debtor has solid proof that the SEIP bonuses are necessary to keep its top management working hard, since they've already received $8.2 million in prepetition retention payments.

The U.S. trustee also said in its objection that EBITDA is a fluid metric that's easily manipulated to game short-term targets like the ones in the SEIP, and that the proposed targets will be easy-to-meet "lay-ups" in any case, since the debtor's EBITDA last year clocked in at $792 million.

Toys R Us is represented by Edward O. Sassower, Joshua A. Sussberg, James H.M. Sprayregen, Anup Sathy, Chad J. Husnick, Robert A. Britton and Emily E. Geier of Kirkland & Ellis LLP and Michael A. Condyles, Peter J. Barrett and Jeremy S. Williams of Kutak Rock LLP.

The committee of unsecured creditors is represented by Cullen D. Speckhart, Olya Antle and Joshua D. Stiff of Wolcott Rivers Gates and Kenneth H. Eckstein, Stephen D. Zide, David E. Blabey Jr. and Rachael L. Ringer of Kramer Levin Naftals & Franken LLP.

The U.S. trustee is represented by Robert B. Van Arsdale, Shannon Pecoraro and Lynn A. Kohen.

The case is In re: Toys R Us Inc. et al., case number 3:17-bk-34665, in the U.S. Bankruptcy Court for the Eastern District of Virginia.