Getting Failure, Paying for Success

Boscov's, a privately held department store chain, is having a busy Labor Day season. In addition to filing for bankruptcy earlier this month, it's marking down linens -- and marking up payments for executives.

What? Give more money to executives who led the company through its decline?

Exactly. The company is calling it a "success payment," and in the case of Boscov's, it's $1.45 million in payments to six executives -- including the C.E.O. -- contingent on fulfilling certain restructuring targets. U.S. Bankruptcy Court in Wilmington, Delaware, is scheduled to take up the proposal on September 5.

Experts say that such payments aren't uncommon. They're often used to entice new executives, or particularly skilled existing managers, to meet specific timetables.

But the executives who would receive the payments are hardly fresh talent with new insights. Chief executive Kenneth Lakin has worked at Boscov for more than 24 years and has run the company since 2001. Finance chief Russell Diehm, also a potential recipient of the payment, has worked there for nearly 20.

"It ties into the whole problems of perks for C.E.O.'s in the context of a financially distressed company," says Jay Westbrook, bankruptcy professor at the University of Texas School of Law. "Maybe the best argument for success payments is that they say to management: 'It's the best thing for the company -- and often for shareholders -- to file for bankruptcy today. You can stay in office, and you can get the success payment.'"

But there's another problem with this kind of payout. Not only does it look like a bonus payout for dubious performance, but it can also promote the wrong strategies.

"There is a close relationship to success and the time you spend in Chapter 11," says Lynn LoPucki professor of bankruptcy law at the University of California, Los Angeles. "The longer you stay in bankruptcy, the more likely you are to be successful" after the restructuring.

"They are paying them to do the opposite," he says.

In other words: Attention would-be corporate raiders -- deep discounts possible after Labor Day.

by Mary Bridges