UPDATE: Feb. 25, 2020: U.S. Bankruptcy Judge David. R. Jones approved McDermott's plan to pay out bonuses of up to $106.2 million for the company's top executives and other key employees.
His ruling yesterday after a hearing in U.S. Bankruptcy Court for the Southern District of Texas in Houston approved the company's original request, which was filed Feb. 10. The court also entered an order approving the bidding procedures in connection with the March 9 auction sale of the company's petrochemical and refining technology group, Lummus Technology. Looking ahead, a hearing on the McDermott bankruptcy plan is scheduled for March 12.
Engineering and construction giant McDermott International, which filed for Chapter 11 bankruptcy protection last month, has requested court approval to pay out as much as $106.2 million in bonuses for top executives and other key employees.
Under the plan, which was filed Monday with Judge David R. Jones, CEO and president David Dickson would receive a bonus worth up to $12.6 million this year, part of $26.8 million in incentives for 13 management team executives who have a central role in the Houston-based engineering company’s Chapter 11 restructuring. The management team members are in line for maximum potential bonuses ranging from $2.6 million to $322,000.
In addition, the company asked to give out as much as $79.4 million in bonus payments to retain 1,112 other key employees, according to the company’s motion that was filed on Feb. 10 in the U.S. Bankruptcy Court for the Southern District of Texas. A hearing on the matter is set for Feb. 24.
The motion notes that compensation of critical employees via the company's annual incentive- and retention-based plans will be crucial to seeing the company through a successful restructuring process.
"Given the debtors’ complex and global operations, the debtors depend on the performance of their management team and highly skilled workforce to drive their financial performance," it reads. "Due to the employees’ specialized skills and project-specific knowledge, it would be difficult for the debtors to replace their employees without incurring substantial costs and disrupting operations."
Without the efforts of key stakeholders, the company would not have been able to facilitate a prepackaged bankruptcy and gain creditors' confidence, the lawsuit states.
"Maintaining a properly incentivized management team and skilled workforce is critical to maintaining a high level of business performance, which in turn minimizes disruption to customers, vendors, and employees," it reads.
If approved, the management team will receive quarterly cash payouts ranging from 50% of target at threshold levels of performance to 200% of target for maximum performance based on seven performance metrics, with an estimated aggregate payout at target performance level at $10.8 million. No payout will be given for performance levels below the threshold.
The performance metrics are:
- Adjusted EBITDA weighted at 27.5%.
- Available cash balance weighted at 27.5%.
- Technology business sale proceeds weighted at 15%.
- Safety weighted at 15%.
- Gross profit achievement target weighted at 5%.
- Letter of credit relief achievement target weighted at 5%.
- Risk mitigation achievement target weighted at 5%.
Including Dickson, the executives in line for bonuses include 13 officers of McDermott’s management team, the first six of whom are considered “insiders” under U.S. Bankruptcy Code. They are:
- David Dickson, President and Chief Executive Officer.
- Samik Mukherjee, Group Senior Vice President, Projects.
- Christopher Krummel, Executive Vice President and Chief Financial Officer.
- John Freeman, Executive Vice President and Chief Legal Officer.
- Brian McLaughlin, Senior Vice President and Chief Commercial Officer.
- Tosha Perkins, Senior Vice President and Chief Human Resources Officer.
- Linh Austin, Senior Vice President, Middle East and North Africa.
- Tareq Kawash, Senior Vice President, Europe, Africa, Russia and Caspian.
- Ian Francis Prescott, Senior Vice President, Asia Pacific.
- Mark Coscio, Senior Vice President, North, Central, and South America.
- Neil Gunnion, Senior Vice President, Project Execution and Delivery.
- Gentry Brann, Senior Vice President, Communications, Marketing, and Administration.
- Dale Suderman, Group Vice President, Chief Accounting Officer.
Other key employees
Besides the management team bonuses, the potential payouts to other employees are estimated at a total of $19,827,336 per quarter with a total not exceeding $79,400,000 for the year, amounting to an average total payout of $71,403 per employee.
The bonuses are warranted in part by the extra work brought on in preparation for the bankruptcy, the motion reads.
"You need to make sure employees stay to operate the business during the restructuring. Additionally you need key employees to stay to complete the restructuring so the company emerges from Chapter 11 in a much better position than when it entered."
Head of North American Research, Debtwire
"In addition to their substantial day-to-day responsibilities, these individuals have generally seen their workloads expand significantly as a result of the Chapter 11 filing," it says.
While it might seem unusual for the leaders and employees of a bankrupt firm to receive bonuses, it is actually standard procedure in this type of case for several reasons, according to Tim Hynes, Head of North American Research at Debtwire.
"You need to make sure employees stay to operate the business during the restructuring," he told Construction Dive. "Additionally you need key employees to stay to complete the restructuring so the company emerges from Chapter 11 in a much better position than when it entered."
In addition, according to an independent compensation consultant retained by McDermott's legal team, the amount of the bonuses falls in line with other companies in similar situations.
Zachary P. Georgeson, senior consulting director at Willis Towers Watson, said that McDermott’s compensation plans are “reasonable and generally consistent with market practice, including similarly situated companies that have sought relief under Chapter 11.”
Georgeson analyzed incentive plans in various Chapter 11 cases over the past five years with revenues over $3 billion including FirstEnergy Solutions, Sears, Toys “R” Us and Windstream Holdings. His analysis found that the cost of the management team bonuses at the target level is at the 62nd percentile of the restructuring compensations in terms of absolute dollars, and at the 45th percentile when evaluated as a percentage of pre-petition revenue compared to other similar Chapter 11 cases.
Earlier this year, analysts told Construction Dive that a bankruptcy filing would help the firm purge its debt and continue on with its $20 billion backlog of work, a sentiment that was echoed by Dickson, who said last month that the plan recognizes the company's fundamentally solid operating business and proven strategy.
"Our record backlog, the majority of which has been booked in the last two years, and high rate of new project awards demonstrates our customers' continued confidence in our business, the demand for our skills and our long-term opportunities ahead," he said.
The Chapter 11 plan, which will allow McDermott to receive more than $2.8 billion in financing and shed $4.6 billion of debt, has the support of two-thirds of its creditors. McDermott has also agreed to sell its petrochemical and refining technology group, Lummus Technology, to The Chatterjee Group and Rhône Group for $2.7 billion.
The New York Stock Exchange intends to remove the company's stock from listing and registration on the Exchange on February 17.
Upon announcing the restructuring, the company noted that its customer projects will continue "seamlessly" and all operations will continue in normal course, adding that all suppliers will continue to receive payments and be paid in full.
"The restructuring transaction will strengthen the company's balance sheet, normalize its trade debt and position the company for long-term growth," said the statement, which noted that confirmation of the plan is expected within approximately two months.