Hertz seeks court approval for millions in employee incentives to drive itself out of bankruptcy

Hertz seeks court approval for millions in employee incentives to drive itself out of bankruptcy

Hertz Global Holdings wants to hand out more bonuses to its key employees as it looks to steer its way out of bankruptcy protection. The Estero-b

Hertz Global Holdings wants to hand out more bonuses to its key employees as it looks to steer its way out of bankruptcy protection.

The Estero-based company — parent of The Hertz Corp. — seeks bankruptcy court approval for millions in incentives it considers critical for motivating and keeping the employees in its management ranks — and necessary to compensate them for their extra hard work in challenging times.

The payouts to hundreds of employees could total more than $14.6 million.

“For those that have remained at the company, the past five months have seen their workloads grow to unprecedented levels,” the company stated in a recent filing in the Delaware bankruptcy court.

Hertz wants to implement two new incentive plans, which would be tied to the company’s performance from June through the end of this year based on achieving specific metrics, such as revenue generation and debt repayment.

The publicly-traded company emphasizes in its court filing that these plans would not be “pay to stay” programs and that participating employees would likely still earn less pay than they have historically at Hertz — and make less money than they would in similar roles at other companies.

In a statement, Hertz spokeswoman Lauren Luster said the dual plans will “provide new incentive compensation opportunities to replace opportunities under our previous programs that were lost as a result of the impacts of the pandemic.”

After the coronavirus pandemic hit in March, Hertz saw its rental revenue virtually vanish and the value of its rental fleet plummet with the spread of the deadly virus, leaving its U.S. operations in dire financial straits and unable to meet its heavy debt load that ran into the billions.

On May 22, the company filed for bankruptcy protection under a mound of debt.

“The new programs are designed to incentivize a core group of employees whose continued efforts are critical to the success of the company and our restructuring objectives,” Luster said.

Round two

Days before the bankruptcy filing, Hertz doled out more than $16.2 million in “cash retention payments” to “a broad base of key employees at the director level and above,” according to a regulatory filing with the U.S. Securities and Exchange Commission.

Despite those payments, Hertz said in its court filing that through mid-August it had lost nearly as many employees at or above the director level this year as it did in all of 2019.

The company’s former CEO Kathryn Marinello left shortly before the bankruptcy filing and Jamere Jackson resigned from his post as chief financial officer a few weeks ago to pursue a new opportunity with AutoZone, a leading retailer and distributor of automotive replacement parts and accessories in the United States.

The employee losses through voluntary departures, coupled with substantial reductions in Hertz’s workforce due to a drastic drop in rental car demand stemming from the pandemic’s impact on the desire and ability to travel, have “left fewer managers with less support to handle an entirely new set of duties,” according to the court filing.

 First, the company’s leadership had to adapt to operating in a “pandemic environment,” Hertz stated, then they had to do the “hard work of reducing its costs without compromising the quality of its products.”

Senior management also had to take on the task of preparing and filing for the bankruptcy and tackle the restructuring, leading some employees to work “more than twice the hours” they did before the pandemic, according to Hertz.

“From procurement managing uneasy vendors, to real estate juggling demands from landlords, to accounting and finance producing a constant stream of reports and studies, to human resources continuing to manage workforce adjustments, the Chapter 11 cases have increased the workload in nearly every department of the company,” Hertz stated. “Just three months into these Chapter 11 cases and with significant work to be done before a plan of reorganization can be developed and prosecuted, these demands are unlikely to subside soon.”

The initial retention payments involved roughly 340 employees, who agreed to stay with the company through at least April 2021. If they leave sooner they may have to give all or some of their bonus money back, as Jackson did, depending on the circumstances of their departure.

Incentives tied to performance

The new plans would work differently, as payments would be tied to the new goals and objectives Hertz has laid out to deal with the realities brought on by the spread of COVID-19, the sometimes fatal disease caused by the coronavirus.

Incentive payments would be scaled based on the degree of the company’s success.

One of the plans would include 14 of Hertz’s top-level employees, from its CEO and president to the senior vice president for strategy. These employees, considered critical to the company’s day-to-day operations, financial performance and restructuring efforts, have seen their workloads grow significantly, while their pay has fallen “far below market,” Hertz said, due to the loss of their usual incentive pay and future earnings potential, which were tied to performance objectives that are no longer relevant, possible — or in play.

Under this plan, top executives could earn more than $5.4 million in combined incentives if Hertz achieves its highest performance levels.

Nearly 300 other mission-critical employees would fall under a separate, but similar incentive plan with maximum payouts that could top $9.2 million. This plan includes senior vice presidents, vice presidents, senior directors and directors, who have also seen their work demands grow, while their pay has shrunk, according to the court filing.

The plans would only benefit a fraction of the company’s workforce in the United States, as Hertz still has more than 18,000 employees across the country.

If minimum performance thresholds are not met, no incentives would be awarded.

Seeking financing

The Hertz Corp. operates the Hertz, Dollar and Thrifty brands, with thousands of corporate and franchise locations throughout the country.

Parent company Hertz Global also owns Donlen, an American fleet leasing and management company headquartered in Illinois, which is part of the bankruptcy filings.

Citing unnamed sources, Bloomberg recently reported that Hertz is considering a sale of its Donlen business if it can get at least $1 billion for it. That would allow it to satisfy some of its debt and raise much-needed financing.

Meanwhile, the Wall Street Journal has reported that Hertz Global “is on the hunt for a bankruptcy loan totaling as much as $1.5 billion,” according to its unnamed sources.

Hertz has been unloading thousands of its used rental cars at bargain prices to raise some of the money needed to bring it out of bankruptcy.

The cash-strapped company had plans — and bankruptcy court approval — to sell up to $1 billion in company shares to raise capital, but suspended those plans after the head of the SEC expressed concerns. Hertz warned the new shares could be worthless, but it still had some takers, with $29 million in stock sold before the company stopped offering it.

Hertz was forced to layoff off or furlough 20,000 employees, more than half of its workforce, after the pandemic wreaked havoc on the travel and tourism industry.

In its court filing, Hertz said it developed the new employee incentive plans with advice from its outside financial and legal advisers. The company’s compensation committee recommended and approved the incentives and its board of directors gave them a thumbs up, seeing them as crucial to Hertz’s stability and future success.

Hertz describes the plans as reasonable and appropriate, as they’re designed to drive corporate performance for the benefit of Hertz and “all of its stakeholders,” and not unusual for large companies trying to fight their way out of bankruptcy.

The company argues that the plans won’t unfairly favor certain employees because they’ll apply to those who are most critical to ensuring a successful outcome in its attempts to emerge from Chapter 11 bankruptcy.

The bankruptcy judge is scheduled to consider the approval of the incentive plans on Sept. 17, with objections due by Sept. 10.

According to The Hill, a news website based in Washington, D.C., it’s not unusual for federal bankruptcy watchdogs and lower-ranking creditors to challenge these kinds of proposed incentive payments, so Hertz may have to justify them to the judge during the upcoming hearing.

A good investment?

Andrew Hill, of Andrew Hill Investment Advisors in Naples, who’s watched Hertz struggle from afar, said in an email that he wasn’t familiar with the specifics of the proposed incentive plans.

Generally, he questioned how effective they might be — and whether they’d be a wise investment, considering the magnitude of the financial challenges Hertz faces.

“The question is if the $14 million will be a good investment for the benefit of debtors or is this just a way for a handful of employees to help themselves to the cash that’s left?” he asked.

“Given the downturn in travel and the advent of ride-sharing, does it make sense for Hertz to attempt a reorganization, or are the debtors better off with liquidating the assets and accepting their losses now, rather than being drained with ongoing payments to employees?” Hill added.

Should Hertz not emerge from bankruptcy — or abandon its state-of-the-art headquarters in Southwest Florida for any other reason — he said he hopes the region’s economic development leaders can find a rapidly growing technology-oriented firm to take its place.

“And yes, with no debt this time,” Hill said.

Hertz began its move from New Jersey into its Estero headquarters in late 2015.

The company was heavily recruited by local and state leaders, who saw it as an economic prize for Florida — and Southwest Florida.

Hertz has received more than $10 million in incentives collectively from Lee County and the state for its relocation after not just meeting, but surpassing its job creation and capital investment requirements early on.

Most of the money — nearly $9.8 million — has come from the state, according to Florida’s economic development portal.

It’s unclear whether the bankruptcy filing and job cuts will affect any future payments from the state or the county — or require Hertz to pay back any of the incentive money it has already received.

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