For companies in financial distress, retaining key employees during a Chapter 11 restructuring can be crucial for success. Key Employee Retention Plans (KERPs) and Key Employee Incentive Plans (KEIPs) are tools used to incentivize employees to stay and perform. KERPs are typically designed for non-insider employees and offer bonuses tied to restructuring milestones, while KEIPs target senior management with performance-based bonuses. Both plans aim to mitigate the uncertainty and disruption of working at a company in bankruptcy.

KERPs are implemented under Sections 503(c)(3) and 363(b) of the Bankruptcy Code, which apply a more lenient standard than Section 503(c)(1), making them easier to approve. These plans often include multiple installment payments and may require employees to release any claims to bonuses outside of Chapter 11. KEIPs, on the other hand, are designed to avoid the stringent requirements of Section 503(c)(1) by tying bonuses to challenging performance targets, ensuring that executives are motivated to maximize returns for stakeholders.

Employees considering participation in a KEIP or KERP should consult with experienced bankruptcy counsel to understand the risks and opportunity costs involved. Staying with a company in bankruptcy may lead to increased responsibilities and delay finding new employment. Understanding the likelihood of success in Chapter 11 and assessing personal risk tolerance are essential steps before making a decision. Read full article here.