Court Shoots Down Dana Exec Comp Plan

September 6, 2006 ( - The US Bankruptcy Court for the Southern District of New York has determined that an executive compensation plan proposed for executives of bankrupt Dana Corporation violates bankruptcy law.

In determining the proposed pay plan was an illegal Key Employee Retention Plan (KERP), Judge Burton Lifland said that while it is possible to create a pay plan that meets limitations of the bankruptcy code or passes as sound business judgment, the package proposed by Dana does neither.

Those objecting to the pay plan argued that low threshold amounts on incentive payments practically guaranteed the payments even if performance levels were low. He also pointed to a completion bonus included in the pay package that paid amounts to executives just for staying with the company until it emerged from bankruptcy. Lifland further said, “Using a familiar fowl analogy, this compensation scheme walks [like], talks [like] and is a retention bonus.”

Additionally, Lifland ruled that a component of the pay plan, which called for payments to the executives in return for signing non-compete agreements, was definitely an illegal severance pay plan under the Bankruptcy Code.

The biggest concern of those objecting to the pay plan was the package for Michael Burns, the auto parts supplier’s president and chief executive officer. While the other five executives were to receive base salaries between $500,000 and $600,000 under the plan, Burns was to receive a base pay of more than $1.5 million. Likewise, two bonus plans included in the executive compensation package called for payments ranging between $300,000 and $600,000 for other executives, but would have potentially produced payments of $2 million to $4 million for Burns.

Those objecting to the proposed plan included employee unions, Dana’s shareholders and creditors, and the US Trustee. Lifland pointed out that the objections were the major difference between Dana’s proposed plan and plans for other firms that had been previously approved by the court.

The court opinion for In re: Dana Corporation, et al. can be read here .