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KEIPing key employees motivated in bankruptcy and beyond

9 Sep 2014

The implementation of key employee incentive plans (KEIPs) during the bankruptcy process and the granting of compensation following the emergence from bankruptcy are 2 ways to retain and motivate talent in an organisation. Taxand USA highlights points to consider when contemplating such arrangements.

It is critical for distressed companies to retain and motivate key talent, both during the bankruptcy process and upon emergence from bankruptcy, as their industry experience and company-specific knowledge are necessary to continue operations. 

Prior to 2005, companies typically retained executives by implementing key employee retention plans (KERPs). However, the severe restrictions imposed under Section 503 (c)(1) ended the use of the plan for top management and many companies now use KEIPs. These plans are performance based and fall outside the restrictive treatment of Section 503 (c)(1) and may be approved by the bankruptcy court based on business judgement and an analysis of the facts and circumstances of the case.

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Brian L. Cumberland
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Taxand's Take

KEIPs, when properly structured, can help bridge the compensation gap between the time in bankruptcy and the successful go-forward organization. Key considerations include:

  • The size of the post-emergence equity pool
  • The amount of equity to grant at emergence
  • The determination of who will receive emergence grants, and
  • The structure of awards

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