In two recent decisions, the United States Bankruptcy Court for the Southern District of New York denied motions by large chapter 11 debtors to approve executive bonus plans designated as key employee incentive plans (“KEIP”), finding that the proposed KEIPs actually were disguised and impermissible retention or “pay to stay” bonus plans for insiders. These are the first opinions to reject so-called KEIPs following a recent line of cases that have approved KEIPs for insiders.

These decisions demonstrate that simply meeting case-specific milestone targets, such as consummation of a plan of reorganization or sale within targeted time frames, is an insufficient performance metric to justify characterizing a bonus program as a true insider incentive plan under section 503(c)(3) of the Bankruptcy Code, as opposed to a retention or “pay to stay” plan subject to section 503(c)(1) of the Bankruptcy Code. Rather, an executive bonus program will be properly characterized as a KEIP only if the debtor proves that the vesting of the bonus awards is closely and directly tied to achieving truly challenging financial and operational goals....

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