Provision of Management Incentives in Bankrupt Firms

We examine the use of key employee retention plans (KERPs) in bankrupt firms. We find that creditor control of bankruptcies is associated with a greater likelihood of bankrupt firms offering retention and incentive bonuses to managers. Retention bonus plans are also more common when there is a greater risk of employee turnover. We find that incentives provided under such plans improve bankruptcy outcomes for creditors along several dimensions: they increase the likelihood of emergence, reduce bankruptcy duration, and result in fewer violations of the absolute priority rule. Our results do not support the common view that retention bonus plans enrich managers at the expense of creditors.