August 11, 2022 – The Debtors filed a motion requesting Court approval of a proposed key employee incentive plan (the “KEIP”) that includes 8 senior executives (the “KEIP Participants”) and comes at a maximum cost of $36.0mn [Docket No. 366]. A hearing to consider the motion is scheduled for August 24, 2022, with objections due by August 19, 2022.
After a "difficult five-week negotiations with the Ad Hoc Group of BrandCo Lenders and two weeks with the [Creditors'] Committee," the Debtors will go into that August 24th hearing with the support of those constituencies, although KEIPs of this size almost invariably draw intense scrutiny and objections*. The Debtors' motion also underscores the importance of the KEIP (and the urgency of obtaining Court approval) by highlighting that two of the eight KEIP Participants have already turned in their notice, "with at least one of those members citing lack of market based incentive compensation opportunities as a factor in her decision to leave. Other members of the Debtors’ senior management team are being actively pursued by recruiters and other companies."
* Undoubtedly filed partly in anticipation of pushback, unusually extensive support materials in respect of KEIP metrics are attached as Exhibit B to the motion and to a declaration filed in support by Alvarez & Marsal [Docket No. 368].
On July 25, 2022, the Court hearing the Revlon cases had previously issued an order approving the Debtors’ requested key employee retention program (the “KERP”) which covers @153 (down from 160) non-insider employees (the “KERP Participants”) at a maximum payout of $15.375mn (reduced from the requested $16.4mn) [Docket No. 281].
The KEIP motion [Docket No. 366] states, “The Debtors’ KEIP is a market-based variable compensation program that will appropriately incentivize the Debtors’ senior-most management team to maximize the value of these estates. It is the product of substantial work by the Compensation Committee of the Debtors’ Board prior to the Petition Date, and Restructuring Committee of the Debtors’ Board after the Petition Date, in consultation with the Debtors’ advisors, and of difficult five-week negotiations with the Ad Hoc Group of BrandCo Lenders and two weeks with the Committee. The Debtors provided substantial information to these constituencies regarding program design and cost, the financial metrics and targets necessary to earn awards under the KEIP program, and other relevant matters, and responded to multiple follow-up inquiries. As of the date hereof, as a result of these negotiations and substantial concessions made by the Debtors, the KEIP enjoys the support of both the Ad Hoc Group of BrandCo Lenders and the Committee, and the Committee recognizes the importance of stability of the Debtors’ management team and the need to incentive them to help the Debtors achieve the goals embodied by the KEIP metrics. Obtaining approval of the market based KEIP as quickly as possible is essential, as the Debtors have lost two key members of their senior management team in recent weeks, with at least one of those members citing lack of market based incentive compensation opportunities as a factor in her decision to leave. Other members of the Debtors’ senior management team are being actively pursued by recruiters and other companies.
Since the outset of the COVID-19 pandemic, the Debtors have faced significant liquidity constraints that worsened exponentially in recent months leading up to the filing, largely because of supply chain issues that made it impossible for them to produce sufficient inventory to fill orders and the consequent impairment of their relationships with their vendors and customers. The Debtors commenced these Chapter 11 Cases to improve their liquidity, reorganize their capital structure, stabilize their supply chain and vendor and customer relationships, and strengthen their businesses. All of this must be accomplished on a highly expedited timetable as the Debtors continue to confront the serious challenges that led to the bankruptcy, with little margin for error. Successfully navigating these challenges will ultimately maximize the value of the Debtors for their stakeholders.
The KEIP is critical to achieving these challenging goals. The KEIP Participants are the eight most senior executives of the Debtors. They are responsible for every facet of the Debtors’ worldwide operations, including its supply chain, sales and marketing, finance, workforce, legal risk and compliance, and product development. Each of them will play an essential role in executing the Debtors’ plan to increase liquidity, normalize supply chain relationships, and increase profitability and value. In connection with the incurrence of their postpetition debtor-in-possession financing facility, the Debtors agreed to certain milestones for these Chapter 11 Cases, which are tight and will be challenging to meet. And all of this must be done while juggling the demands of the Chapter 11 process itself. The KEIP is critical to incentivizing the Debtors’ management team to expend the enormous effort, dedication, and focus that will be needed to meet these challenging goals.
It is critical to implement the KEIP promptly to ensure that the KEIP Participants remain focused on achieving the Debtors’ goals without the stress of uncertainty regarding their personal compensation opportunities. Even though the KEIP Participants have worked tirelessly to prepare the Debtors for these Chapter 11 Cases, the restrictions placed on the Debtors as a result of that very filing deprived the KEIP Participants of the opportunity to receive ordinary course annual cash bonuses and change of control protections, and have eliminated the incentivizing value of their equity-based compensation that was available to them before the Petition Date. Today, almost two months into the Debtors’ Chapter 11 Cases, the compensation earned by the Debtors’ senior management is far less than that earned by their peers at the Debtors’ competitors, and management has little certainty regarding what compensation opportunities may be approved for them or when that approval may be granted.
Indeed, in just the past week, two of the eight original KEIP Participants gave notice or publicly announced that they will be leaving their roles; as discussed below, the Debtors request approval of their KEIP awards to keep their chief financial officer motivated prior to her departure as she transitions her role, and the authority to use the awards allocated to the President, Americas to compensate a successor in her position. In today’s labor market, each of the KEIP Participants has opportunities to find employment with non-bankrupt employers who can offer guaranteed market-competitive compensation opportunities without the burdens of uncertainty and increased workload created by the chapter 11 process.”
As part of the review of their compensation programs in light of these Chapter 11 Cases, the Debtors determined to discontinue the ordinary course incentives that the KEIP Participants received as part of the Debtors’ prepetition compensation programs. In order to restore the alignment of the KEIP Participants’ compensation opportunities with the Debtors’ operational and strategic goals and stakeholders’ interests, the Debtors worked with their compensation consultant, WTW, and their restructuring advisor, A&M, to formulate a proposal for the KEIP, which was then refined over the course of discussions with certain stakeholders. On August 4, 2022 the restructuring committee of Revlon, Inc.’s board of directors (the “Board,” and such committee, the “Restructuring Committee”) unanimously approved the Debtors seeking court approval of the KEIP in order to provide cash-based incentive compensation during the pendency of these Chapter 11 Cases to the KEIP Participants.
The KEIP is structured to tie incentive compensation to operational performance in these cases and to pay only to the extent meaningful performance is achieved. The KEIP provides cash awards to the KEIP Participants based on the achievement of business performance as measured by tested recurring EBITDA, tested cumulative operating net cash flow, and tested net sales metrics.
Key Terms of the KEIP
- KEIP Participants: They are the following eight members of the Debtors’ executive leadership team:
9 As disclosed in the Form 8-K filed on August 9, 2022 by Revlon, Inc., Mrs. Dolan will be leaving her role as Chief Financial Officer effective as of September 30, 2022. Based on that departure date, Mrs. Dolan will be eligible to receive a KEIP award, if earned, for the third quarter of 2022. The Debtors do not currently have any intention to hire a replacement chief financial officer, and instead plan to hire an interim chief financial officer provided by A&M. The interim chief financial officer provided by A&M will not be eligible for any awards under the KEIP.
10 The current President, Americas has given the Debtors notice of her resignation. The Debtors are currently searching for a replacement for this role.
- Awards: Each KEIP award will provide for a cash payment (to the extent earned based on actual performance) after the conclusion of each of the performance periods set forth below. Potential payments are based on achievement of specified performance metrics for each performance period.
- Performance Periods: Performance will be measured based on fiscal quarters commencing at the beginning of the third quarter of fiscal year 2022 and continuing through the end of the fourth quarter of fiscal year 2023.
- Performance Periods: Performance will be measured based on fiscal quarters commencing at the beginning of the third quarter of fiscal year 2022 and continuing through the end of the fourth quarter of fiscal year 2023.
- Payment Dates: The KEIP will be paid in quarterly installments. Subject to entry of the KEIP Order, any payment earned for any performance period will be made as soon as practicable after the end of such performance period. Any payouts for the quarter in which the Debtors emerge from chapter 11 and any quarters thereafter will be paid by the reorganized Debtors. Pro-rata amounts earned for the period prior to emergence for the quarter of emergence shall be placed into escrow on the effective date of any confirmed plan of reorganization.
If approved, the KEIP would provide aggregate (for all participants) threshold, target, and maximum opportunities of approximately $14,486,166, $28,972,332, and $36,015,415, respectively, over its 18-month duration. The annual award opportunities available to KEIP Participants under the KEIP are summarized as follows:
The Debtors’ current Chief Financial Officer, who has announced that she will be leaving her position with the Debtors, will be eligible for a KEIP award solely for the third quarter of 2022, to the extent she actually remains with the Debtors through the end of such quarter, in threshold and target quarterly opportunity amounts of $400,000 and $800,000, respectively, and will not be subject to the clawback once paid.
About the Debtors
According to the Debtors: “Revlon has developed a long-standing reputation as a color authority and beauty trendsetter in the world of color cosmetics and hair care. Since its breakthrough launch of the first opaque nail enamel in 1932, Revlon has provided consumers with high quality product innovation, performance and sophisticated glamour. In 2016, Revlon acquired the iconic Elizabeth Arden company and its portfolio of brands, including its leading designer, heritage and celebrity fragrances. Today, Revlon's diversified portfolio of brands is sold in approximately 150 countries around the world in most retail distribution channels, including prestige, salon, mass, and online. Revlon is among the leading global beauty companies, with some of the world’s most iconic and desired brands and product offerings in color cosmetics, skin care, hair color, hair care and fragrances under brands such as Revlon, Revlon Professional, Elizabeth Arden, Almay, Mitchum, CND, American Crew, Creme of Nature, Cutex, Juicy Couture, Elizabeth Taylor, Britney Spears, Curve, John Varvatos, Christina Aguilera and AllSaints."
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