Sears Executives May Get $25 Million in Bonuses as Laid-off Employees Denied Severance After Bankruptcy

After filing for Chapter 11 bankruptcy in October, the parent company of retail giants Sears and Kmart, Sears Holdings, has obtained permission from a U.S. bankruptcy court to pay out as much as $25.3 million in bonuses to Sears executives.

The current plans for the bankrupt company include closing more than 100 stores and eliminating 5,457 employee positions, many before Christmas, the Chicago Tribune reported. Laid-off employees will receive no severance pay. Liquidation sales have since boosted Sears's profits by 4.3 percent.

Judge Robert Drain of the Southern District of New York accepted the retailer's claim that executive bonuses were necessary for employee retention after reporting losses of nearly $1.9 billion in the first three quarters of 2018.

"Under these circumstances, it would be understandable if many key employees are asking themselves whether they should be seeking other opportunities," Sears said in the court filing, winning approval to split bonuses of up to $8.4 million between 19 executives. An additional $16.9 million was earmarked for a group of 315 senior employees, splitting into bonuses equal to 30 to 40 percent of their salaries.

Former Sears CEO Eddie Lampert, who stepped down when Sears declared bankruptcy but remains chairman, was known for running the company via videoconference from his island estate, projecting into Sears headquarters from behind a desk with the Sears logo. Same-store sales declined every year under the billion-dollar hedge fund manager's leadership.

After masterminding the 2005 merger of Sears and Kmart, Lampert spent $6 million on stock buybacks to reward investors and boost the share price, further loading corporate debt on Sears and Kmart via loans from ESL.

As the stock and profits tanked, Lampert began deconstructing the retailer's assets, selling 266 Sears and Kmart properties to Seritage Growth Properties, a real estate investment trust newly created by Lampert's hedge fund, ESL Investments. Seritage then charged $135 million in first-year rent to the flailing retailer, eating into its operating revenue. With ESL holding a large part of Sears's debt, not only does Lambert profit from loan fees charged to Sears, but also stands to recoup more than a billion dollars from the bankruptcy proceedings.

In February 2017, Sears paid out $40 million to shareholders to settle a lawsuit assailing the arrangement, accusing Lampert of pillaging Sears's "crown-jewel assets."

The fall of Sears and Kmart closely follows a pattern set by private equity firms with companies like Payless and Toys "R" Us: loading the newly acquired company with debt while paying billions out to investors through dividends, stock buybacks, consulting and debt servicing fees.