Bethlehem Steel Corp., which filed for bankruptcy protection in October, lost more than a million dollars a day from operations in the first 11 months of last year. It wants to cut about 2,000 union jobs, and it has already slashed its salaried work force by 30 percent over the past three years.
Yet at the same time, the company has asked a bankruptcy judge to approve an employee-retention plan that could cost the company about $9 million.
The request might appear paradoxical, but it's a typical move for companies in Chapter 11 proceedings and one that experts say is, if handled correctly, a good strategic move.
"Absolutely, the minute employees nowadays get wind that there is a reorganization, a change of venue, a hint of downsizing, they start to look at what other options they have," said Beverly Kaye, founder and chief executive of Career Systems International in Scranton, Pa.
"It is extremely important that a company facing that, or about to face it, looks at 'what can we do to hang on to our talent.'"
Bethlehem has identified 87 salaried workers as "key employees" who would be eligible for the retention bonuses.
For top executives who generally make more than $300,000 a year, the bonus would range from 60 percent to 80 percent of their salaries. For others, the bonus would be between 30 percent and 70 percent of salary.
How money would be paid
The bonuses would be paid out in three equal installments between July and February 2004 and would total between $3.6 million and nearly $8 million; another $1 million would be set aside as a discretionary fund and be disbursed to employees by Chief Executive Officer Robert S. "Steve" Miller Jr. Miller would not receive any of the bonus money.
"It's not that unusual for a company that is in trouble to really have to reach out to a high-value population of employees," said Joe Bruccoleri, director of retention services at consulting firm Drake Beam Morin.
'It's good business judgment'
"Without those key employees, [the company would] never have any future. ... From a business standpoint, it's good business judgment. From an outsider's standpoint, it looks like they're fattening their wallets, but that's not the case."
Many other companies operating under Chapter 11 also have asked the courts to approve retention bonuses. They include Polaroid Corp., AMF Bowling Inc. and Warnaco Group, the maker of Calvin Klein jeans and Speedo swimwear.
Enron Corp., the largest company ever to file for bankruptcy protection, has gained considerable attention for its retention program. The energy trader paid $105 million to several hundred executives just prior to its filing last month.
John Cirri, president of United Steelworkers Local 2609, which represents hourly employees at Bethlehem's Sparrows Point cold-rolling mill, said he needs more information about the bonuses before he can take a position on them - but he does think the USW should be part of the process.
Hourly workers too?
"The union should have equal say over who is essential and who is not, otherwise I would be opposed to the company calling the shots," he said, adding that the bonuses should include hourly workers.
In its filing with the bankruptcy court, Bethlehem said 187 salaried employees have resigned since 1999, largely because of its shaky finances.
Dorothy Stephenson, Bethlehem's vice president of human resources, said the steel maker is especially seeing turnover in engineering and information technology - fields where employees can transfer their skills outside the troubled steel industry.
"The real issue for me as a human resource person is where the turnover is occurring," she said. "It's occurring in the younger, highly skilled group of people who are essentially our next generation of leaders."
Stephenson said it may seem odd to reward managers who were in place when the company spiraled into bankruptcy, "but it's important to understand that the current management team did not build up a lot of these legacy issues," referring to the health care and pension obligations that helped drive Bethlehem to seek Chapter 11 protection.
Health care for 130,000
When it filed for bankruptcy on Oct. 15, Bethlehem listed $4.2 billion in assets and $6.75 billion in liabilities, including an unfunded health care obligation of nearly $3 billion. Bethlehem, with about 13,000 employees and 74,000 retirees, pays the health care costs of 130,000 current and former employees and their dependents.
"The financial situation is a legacy of possibly decisions that were made quite some time ago," Stephenson said. "So you have to weigh the cost of a retention program to what it would cost you to bring someone into the organization now to replace" an employee.
Bruccoleri, of Drake Beam Morin, said the cost of replacing an employee is generally 150 percent of that worker's salary.
"If you lost a manager making $50,000, it would cost you $75,000 to rehire someone," he said. "And that's not even talking about the loss of knowledge."
Indeed, in the motion asking for approval of the retention program, Bethlehem said "key employees are an extremely valuable asset. They possess unique knowledge; skills; experience; and customer, supplier and bargaining-unit employee relationships that are vital to the business enterprise and in many cases impracticable to replicate."
"If it's just throwing money at executives, then it's not a good practice, but if they are tying it to their longevity and to their performance, now it makes some sense," said Roger Herman, CEO of the Herman Group, a work force consulting firm in Greensboro, N.C.
"There's got to be a connection there or they're just throwing their money away."