By Rachel Sams
Baltimore Business Journal
Updated: 7:00 p.m. ET March 27, 2005

http://msnbc.msn.com/id/7314267/

[For an archive of articles and documents concerning asbestos-related occupational and environmental safety and health and compensation for asbestos injuries, visit http://www.nycosh.org/workplace_hazards/asbestos.html]

Paul J. Norris made $5 million last year leading a company struggling to reorganize its debts in Chapter 11 bankruptcy.

Norris, CEO of Columbia's W.R. Grace & Co., wasn't the only beneficiary at Grace. Fred Festa, brought in by Grace as president and chief operating officer in 2003, made a total of $1.7 million last year. And other top executives saw bonuses more than double.

Some question why a company in Chapter 11 pays so well.

But while Norris' and Festa's compensation might raise eyebrows, it also opens a window into the world of Chapter 11, where pay packages totaling more than $1 million are not uncommon. Bankrupt companies want to keep experienced employees at the helm, and they don't have valuable stock options to offer as an incentive, so they turn to retention bonuses.

Judges often approve the payment of such bonuses, and sometimes the creditors the company owes money to don't object.

"Typically, neither creditors nor the court will oppose any salaries that executives or professionals may take," said Lynn LoPucki, a law professor at University of California Los Angeles.

Grace, a specialty chemicals maker, is one of the area's largest companies and has operated in Chapter 11 since 2001. Grace employs about 500 at its Columbia headquarters and another 700 at its Curtis Bay Manufacturing Works.

Grace spokesman Greg Euston said executive pay packages at the large chemical company are competitive -- and deservedly so.

"We think Grace as well as its creditors and shareholders have a legitimate interest in having a company that is well run and, over the long term, is growing and profitable," said Euston. "Grace gives executives competitive packages because it is competing with other specialty chemical companies."

Grace reported a net loss for 2004 of $487 million, with much of it coming from legal costs related to its bankruptcy. The company filed a reorganization plan in Delaware's bankruptcy court last year. But its core operations remain financially healthy, said Euston, with sales rising 14 percent last year to $2.3 billion.

Grace filed bankruptcy in 2001 not because of financial problems in its operations, but because it faced thousands of asbestos-related lawsuits.

Other regulatory issues have surfaced since, including a federal indictment in February charging Grace and executives with hiding a Libby, Mont., mine's health risks from townspeople.

Executives at other companies that filed Chapter 11 because of asbestos-related liabilities also received million-dollar pay packages.

Armstrong World Industries, which makes floors, ceilings and cabinets, filed Chapter 11 in 2000. In 2003 -- the most recent year for which figures are available -- President M.D. Lockhart made a total of $2.4 million. At fiberglass maker Owens Corning, which also filed for bankruptcy protection in 2000, CEO David T. Brown made $3.8 million in 2004.

Pay at Grace

Norris, who has led the company since 1998, will retire as CEO of Grace in May but remain as chairman. He received a $1 million salary in 2004, unchanged from the previous year, according to Grace's annual report filed with the Securities and Exchange Commission. His bonus more than doubled to $2.5 million. He also received $246,840 under a long-term incentive plan and $1.4 million in other compensation, including a $1.2 million retention bonus.

Five million dollars in total compensation "looks like a high salary to me for a CEO in a bankruptcy case," said LoPucki, who has an online database of more than 850 Chapter 11 filings.

That's even considering Grace's size, he said. The firm's market capitalization hovered around $600 million this week. But experts say it's not unusual for Chapter 11 companies to issue annual retention bonuses of one to two times an executive's salary.

Euston said incentive pay is linked to Grace's pretax operating earnings, which exclude special charges such as legal costs.

Norris is expected to receive $1.2 million this spring from a long-term incentive plan. Under his employment contract, he will get a $6 million lump sum when he retires from Grace, which includes a supplemental pension payment and benefits accrued under a Grace retirement plan.

He could also receive up to a $1 million bonus based on Grace performance in the first half of 2005. Additionally, the company has set target awards for Norris totaling about $1.9 million under two other long-term incentive plans, though he could earn much more or much less depending on company performance.

Norris also has a contract to serve as a consultant after retiring from Grace, at an initial monthly retainer of $35,400. Additionally, Grace will cover Norris' relocation costs if he moves less than two years after leaving the board. Grace says that award could cost $440,000.

Festa -- expected to take over from Norris as CEO -- made $558,333 in salary last year and $1.1 million in bonus. He made another $66,000 in long-term incentives and other compensation.

Grace expects to pay Festa $247,669 this spring under a long-term incentive plan. Under two other plans, Festa has target awards totaling $2.4 million, though he could earn more or less based on company performance. Under his employment contract, Festa is entitled to a Chapter 11 emergence bonus of $1.7 million.

Getting approval

Companies in Chapter 11 must get the bankruptcy judge's approval on many business decisions they make, including some compensation decisions. Shortly after filing Chapter 11, companies submit their proposed retention plans for key executives. Bankruptcy judges must approve the terms, and any creditor who wishes to object may.

But many conflicting dynamics are at work in Chapter 11, says LoPucki, author of "Courting Failure: How Competition for Big Cases Is Corrupting The Bankruptcy Courts." Courts' competition for cases often makes judges loath to go against the wishes of debtors, including their compensation packages, he said. And creditors are negotiating with company management to get paid -- a disincentive for them to object to managers' pay packages.

The rationale for retention bonuses is that "the company would be worse off with nobody with historical knowledge to lead them through bankruptcy," said attorney Kevin Hroblak of Whiteford Taylor & Preston, who has represented debtors, creditors and bankruptcy trustees. "If a company's executives walk out, clearly [creditor] recoveries are not going to be maximized." Still, some criticize a system that essentially rewards the leaders who were in charge when a company went bankrupt.

Scott Baena, an attorney representing the committee of asbestos property damage claimants in the Grace bankruptcy, said his committee and two others objected to the bonus proposed for Festa when the company exits Chapter 11.

Under Grace's proposed plan, the bonus will be paid even if Grace does not emerge from bankruptcy within three years -- which Baena argues means it is not really an emergence bonus. Grace has 30 days to revisit the issue with creditors.

On the other hand, Ted Weschler, chair of the equity committee -- which represents Grace shareholders -- said his group has never objected to any aspect of Grace's compensation.

Managers have continued to maximize shareholder value -- leading several acquisitions this year -- and worked well with creditors who have divergent interests, he said.

"The management team of Grace, from the time they went into bankruptcy, has done an outstanding job," he said. "I'm a big believer in superior compensation for superior performance."

© 2005 Baltimore Business Journal

*** POSTED MARCH 31, 2005 ***