Provision of Management Incentives in Bankrupt Firms

Abstract

This paper examines the use of key employee retention and incentive plans (KERPs) in bankrupt firms. We find that firms in Chapter 11 are more likely to offer KERPs when firms are located in thicker employment markets, when creditors have strong control, and when bankrupt firms have complex operations and claim structures. Newly hired turnaround specialists are more likely to be covered by KERPs than incumbent CEOs. Objectives set by incentive plans are strongly linked to the probability of emergence. Our results suggest that KERPs are an efficient contracting solution to the problem of retaining and incentivizing key employees in bankruptcy.

Keywords: key employee retention plans, incentive contract, Chapter 11, compensation, retention bonuses, credito control, human capital

JEL Classification: G33, K22, M52, M54