Holding back bankruptcy: the very survival of a troubled company that is approaching—or in—bankruptcy can depend on how well HR gathers information, trims costs, retains key people and communicates with stakeholders - Cover Story

HR Magazine, May, 2003 by Robert J. Grossman

Now, although consensus is preferable, it's not required. "No contract is sacred if you follow the right procedures," says Rizzardi.

Pulling out from defined benefit pension commitments is an example. The Pension Benefit Guaranty Corp. (PEGO) insures future pension payouts, although not at full value for top-earning personnel. But before a company can pass the buck on its pension obligations, it must work with the PBGC to try to rescue the plan.

When the employer seeks a "distress termination," it has the burden of demonstrating to the PBGC that it can't continue to pay accrued retirement costs. If both sides agree, the distress termination will be granted by the court as part of the reorganization. If the PBGC does not agree, it can take the issue to the bankruptcy judge for resolution. "The law requires you to fully honor the plan till you prove you need to cut your contributions or terminate," says Barbara Cronin, principal in Gardner Carton and Douglas's HR practice in Chicago. "The PBGC wants to get as much from you as it can, so it's possible to negotiate a reduction" in the employer's contributions to the plan or to spread out contributions over more time.

Terminating a plan and turning over obligations for its future commitments to the PBGC demoralizes employees and retirees and usually penalizes top earners because the PBGC retiree payouts are capped, currently at $3,665 per month for a worker who retires at age 65.

Similarly, the company can step back from health benefit commitments both to workers and retirees. Following notice requirements of the Health Insurance Portability and Accountability Act, co-payments can be increased or plans eliminated outright. Unlike pensions covered by the PBGC, there is no government safety net for those who lose benefits.

Retention and Communication Plans

During Chapter 11, a key strategic thrust is finding ways to hold on to key personnel. "When a company gets in trouble, people get nervous, and your competitors get excited," consultant Longnecker says. "The sharks start swimming around the chum, going for the good people."

In addition to staff specialists such as lawyers and turnaround experts, seasoned managers are essential to continuing operations. "I worked with our executive team to map out a strategy that would let us identify [retention] criteria and what we would propose as tools to wed them to the company," Filipovitz says. "We had to petition the court and say, 'There are X number of people that we need to be sure are here.' In analyzing, we separated them into three categories: people who were important to us in the short run, those important in the short and long run, and people who were good but who we were willing to risk losing."

Filipovitz's HR team led a process that identified 80 key people to retain from among 2,000. Then he formulated a retention program costing $6 million and gained creditor and court approval to implement it. (For information on how to implement retention bonuses, see "Staying Power" on page 66.)