Naples businessman David Hoffmann and the Hoffmann Family of Cos. has agreed to allow Hertz to store its idle rental cars on the arena grounds at no cost. Fort Myers News-Press
A U.S. bankruptcy judge has rejected Hertz's controversial employee incentive plans, calling them "offensive."
After hearing testimony from all sides and allowing for the cross-examination of a few witnesses in a Delaware courtroom Thursday afternoon,Judge MaryWalrath struck them down, going along withthe objectors.
Objectionscame from a group of former executives, who fear the big payouts will jeopardize their promised retirement income from the company, and the U.S. trustee overseeing Hertz'sChapter 11case, who questionedthe real intentions and purpose behind them.
While Walrath spurned the incentive plans, she left the door open for Hertz to come back with revised ones, moving to continue the hearing and her final decision to a later date.
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As it fights to drive itself out of bankruptcy, Estero-based Hertz Global Holdings parent of The Hertz Corp. has argued suchincentives are critical for motivating and keeping the employees in its management ranks and necessary to compensate them for their extra hard work in challenging times.
As written, the plans could have resulted in payouts of more than $14.6 millionto hundreds of employees, including its top brass.
In her ruling after anhours-long hearing, Walrath said it seemed offensive to award senior executives bonuses as they're the very same ones who got hefty retention payments a few days before the company'sbankruptcy filing, even though they "weren't entitled to them under the debtors' ownpolicy."
Hertz doled out more than $16.2 million in "cash retention payments" to what it described as "a broad base of key employees at the director level and above," raising some eyebrows.
Under the incentive plan proposed for top executives, a little over a dozen of Hertz's highest-ranking employees could have earned more than $5.4 million in additional bonus pay if Hertz achievedits highest performance goals.
Barb and Pete Martinez of Estero chug past hundreds of rental cars now stored around the Hertz Arena off Ben Hill Griffin Parkway in Estero. Naples businessman David Hoffmann and the Hoffmann Family of Cos., whichbought the Everblades hockey team and the Hertz Arena in August, agreed to allow Hertz to store its idle rental cars on the arena grounds a few weeks ago. It's yet another sign of the devastating blow thetourism industry has taken from the pandemic locally, nationally and globally, due to travel bans and other restrictions designed to curb the spread of COVID-19.(Photo: Michael Braun/news-press.com)
More than 50 others who received retention pay would have been able to collect more money too under a second incentive plan.
Hertz filed for bankruptcy on May 22 after seeing its rental revenuevirtually vanish and the value of its rental fleet plummet with the spread of the coronavirus, leaving its U.S. operations in dire financial straits and unable to meet its heavy debt load.
While Hertz may have slipped into bankruptcy because of the outbreak of COVID-19 the incurable, sometimes fatal disease caused by the coronavirus and not due directly to any wrongdoing or mismanagement, Walrath said it shouldn't mean its leaders are entitled to bonuses because of the unforeseen disaster that's made their lives harder.
"There a lot of people who were affected by COVID," she said. "A lot of people have had their compensationcut as a result of COVID. Many people have been furloughed and lost their jobs completely."
In making her decision, Walrathquestioned the validity of the incentive plans, saying she had "serious problems" with them, including the three levels of metrics Hertz proposed to use as triggers for the payouts.
The judge arguedemployees should not be givenrewards for not allowing Hertz's situation to get any worse or for keeping conditions going in the direction they're already headed as proposed in the plans. Thepayouts, she said, should be based on meeting much harder goals or true "stretches," if they're really designed to be incentives.
"I am very concerned about the tying of these metrics to what the debtor is already doing," she said.
As a judge, she saidshe'd never seen a situation where a company paid out millions in bonuses days beforea bankruptcy filing, only to come back a few months later and ask for thesekinds of incentives post-bankruptcy.
"I think more has to be established on why the employees who got their retentionbonuses and agreed to stay with the company are not going todo their best to make sure this company survives and succeeds," Walrath said.
She questioned why the request for the incentiveshave come so soon, when the company has yet to file a reorganization plan.
Walrath suggested Hertz change its metrics or come up with better arguments for why it chose the ones it did to address a "gut feeling" that the incentives aren'tnecessary or may not be "appropriate at all."
Hertz rental car customers drop off vehicles at the Southwest Florida International Airport on Tuesday May 7, 2013.(Photo: Andrew West/news-press.com)
In his testimony, Hertz's attorney Jason Zakia defended the incentive plans, arguing they were crafted in everyone's best interest by consultants and outside directors who would not directly benefit from them.
As for the metrics, he said, none of them would allow the company to be "simply put on autopilot."
Zakia argued the metrics and goals can't be so difficult to meet that they're seen as unachievable or unattainable because they would then "serve no incentivizing purpose whatsoever."
"Indeed, they'd serve no purpose for anyone whatsoever," he said.
"You need to strike a balance between something that is achievable, possible, but something that's incentivizing and motivating, not automatic. That's exactly what happened here," Zakia said.
He emphasized that if the goals were achieved and all the bonuses paid out it would be "good news for everybody."
Even when counting the prior bonuses, Zakia said the compensation for plan participants in no case would have exceeded the median pay offered at industry comparable companies or for comparable jobs.
He described the incentives as a wise expense based on Hertz's business judgment.
Hertz's unsecured creditors' committee supported the plans, arguingthey'd result in a stronger company performance that could ultimately allow the car rental companyto pay back more of what it owes.
"They looked at this very carefully," Zakia said. "This committee is no rubber stamp and they weren't a rubber stamp here."
Thomas Mayer, an attorney representing the unsecured creditors' committee, agreed, saying the group had done a lot of research of its own on the plans and their metrics.
"I don't know how much, if any of these bonuses, will be paid. So we do not view these as layups. We do not view these aspayments for just showing up," he said.
There's a long road to recovery ahead and theplans, Mayer argued, could help the company get out of bankruptcy sooner.
"It is highly unlikely that this debtor is going to be able to exit bankruptcy bythe end of 2020," hesaid.
Starfish greet Hertz Gold Plus Rewards customers in the rental area at Southwest Florida International Airport.(Photo: Casey Logan/The News-Press)
Representatives with FTI Consulting, which recommended and helped create the incentive plans, defended themat the hearing too, answering tough questions asked by attorneys representing the other side, who drilled down into the nitty-gritty details of them.
LindaRichenderfer, counsel forU.S. TrusteeAndrew Vara, asked pointed questions about how the metrics were determined and where the company's current performancestood against those metrics.
"In some areas we are improving and are ahead of the metrics. Inothers, we still trail behind or have work to do," said Michael Buenzow, a bankruptcy consultant with FTI.
Based on the proposed metrics, he said, thecompany was pacingahead on the sale of its surplus rental cars, for example, but still hada long way to go to meet its goals for operating cash flow, which continues to be in the negative.
Richenderfer also picked apart the comparable analysis used to develop the plans, questioning the peer group the consultants considered in coming up with the scope and amounts for its requested incentives.
Attorney John Demmy, representing the retired executives group, questioned how the performance targets were determined for each of the metrics, suggesting that they seemed too low based on business improvements seen since the early onset of the pandemic.
He pointedly asked Buenzow if any of the proposed metrics could be achieved by management just showing up.
Buenzow answered with a firm "absolutely not."
"For each of themetrics, there is a significant amount of effort that needs to be undertaken by the employees," he said.
The judge and the objectors remained skeptical.
The executives Demmy representsagreed to defer part of their compensation in return for Hertz's promises to pay them back what they're owed in retirement benefits.
The group claims that a few days after Hertz's bankruptcy filing thecompany told them the lifetime benefits they had been receiving were "required to stop."
As a group, the executives estimate they're still owed more than $5.5 million in benefits based on "over 182 years of accumulated service" withHertz.
That's just a small fraction of what Hertz Global owes.
By the end of March, the companyhad racked up more than $24 billion in debt, according to its bankruptcy filing, with only $1 billion of available cash to operate and pay its bills.
The Hertz Corp. operates the Hertz, Dollar andThriftybrands, with thousands of corporate and franchise locations throughout the country.
Parent company Hertz Global also ownsDonlen,an American fleet leasing and management company based in Illinois, which is part of the bankruptcy filings.
The company completed its new multmillion-dollar global headquarters in Estero at the end of 2015. The companyreceived millions in state and local incentives to relocate from New Jersey to Southwest Florida.
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