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You asked, we answered: How can Tops do bonuses in bankruptcy?

Last week, Buffalo News deputy business editor David Robinson reported that Tops Markets' new bonus proposal could reward CEO Frank Curci more than $1.3 million and its chief operating officer John Persons more than $1 million if the supermarket company exceeds financial targets as it restructures.

A separate bonus proposal could also reward up to $3.5 million to 115 key employees, Robinson reported.

Tops Markets filed for Chapter 11 bankruptcy in February, and since then, many readers have asked questions, from how stores and customers might be affected to how the bonus proposal would work. Robinson, who has been following how the bankruptcy filing might affect store closings, union pensions and more, answered below.

From Bob Lonsberry, Randy Aderman, Lorne Catalano, Jason Bray Miller, Joanne Brodka Sanchez and James Simons: How does throwing money at executives who helped cause your lack of money minimize creditor losses? Aren’t they the ones who put them in bankruptcy to begin with? How can you bankrupt a company and get a bonus?

Robinson: Paying big bonuses to top executives when a company is in bankruptcy, preparing to close stores and threatening to cut payments to the main pension fund for its workers is a sure way to create controversy.

In Tops' case, the company said it needs current management to remain because they know the business, they know the market and that, by and large, have been doing a pretty good job running the business, but for the hefty debt payments that financially hamstrung the business.

Bankruptcy is about restructuring the business so its creditors can be repaid as much as possible. Tops says the best chance of that happening is with its existing management.

There are a handful of reasons why Tops is in bankruptcy, and some of them don't involve those managers.

For starters, Tops' previous owners, Morgan Stanley Private Equity, saddled the company with an untenable amount of debt: $724 million. The interest on that debt topped $80 million a year, and that was enough to cause Tops to steadily lose more and more money.

Here's the kicker: Almost half of that debt that pushed Tops into bankruptcy wasn't taken on to help the company grow or make its stores better. Morgan Stanley borrowed $350 million and kept it for itself, through a series of dividend payments. In a very real sense, Morgan Stanley borrowed money to get rich and left Tops with a millstone of debt around its corporate neck.

So there's that. Add to that the competitive local grocery market, with Wegmans, Aldi, Save-A-Lot, Whole Foods, Dash's, Trader Joe's and other stores all competing for a piece of a market that isn't growing (because the Buffalo Niagara and upstate New York population isn't growing). Add in declining meat and dairy prices, and Tops' sales have been pretty much stagnant.

All of that is beyond the control of Tops' management.

But it certainly is fair to look at the stores, the way they are staffed and stocked, and to make judgments about whether its management is worthy of bonuses.

From Jacquelyn Marie: Why do the bankruptcy courts allow this? It happens in every bankruptcy.

Robinson: It's not just bankruptcy courts. It's corporate America.

Top executives have a lot of leverage, and retention bonuses are a way for them to tap into a wariness of changing leadership and the uncertainty that comes with it. In Tops' case, their plan is to restructure the company with existing management in place by getting its debt holders to swap their debt for stock in the reorganized business.

There's also the whole climate in the United States toward executive compensation, where the gap between what CEOs are paid and what the average worker earns is widening. Walmart CEO Doug McMillon earned $22.8 million last year, while the average Walmart worker made $19,177.

From Gary Haley: Doesn't bankruptcy mean you have no capital? No money to operate with. Where would the $1.3 million come from to pay off the CEO?

Robinson: Bankruptcy allows a company to hit the reset button on its finances.

When a company goes into bankruptcy, many of its previous debt obligations are thrown into limbo. Some debt will be repaid in full. Some debt will be repaid in part, and others not at all. That eases the drain on the cash that a company like Tops generates through its daily operations.

Beyond that, Tops lined up more than $200 million in credit that it can tap into to keep its business funded during bankruptcy.

From Raychel Gabryszak: "Key employees" ... meaning who?

Robinson: The biggest bonuses would go to Tops' five highest-ranking executives, including CEO Frank Curci and President John Persons. Both could get more than $1 million apiece in bonuses if Tops exceeds its financial targets by more than 10 percent through the end of this year.

The company also is offering smaller bonuses to 115 other "key employees" who have expertise and experience that the company believes is essential for it to restructure. Tops is worried that those store managers, buyers, operations people and other supervisory level employees could be spooked by the uncertainty now surrounding the supermarket chain's business and could start looking for other jobs. Tops also said they deserve bonuses because these employees are not only doing their regular jobs, but taking on other work associated with the restructuring.

From Cheryl Korn: With the bonuses, do price increases come yet again? I have a Bonus Card, but I'd hate to tell you, Tops, my Shopper Club card at Wegmans gets used a lot more.

Robinson: The bonuses don't have a direct effect on Tops' prices, just its operating costs. That said, part of Tops' problem, as a supermarket that relies on sales promotions, is that it's getting harder for its sales to beat the prices already offered every day at deep discounters such as Aldi and Save-A-Lot, which rely on private-label products.

From Daniel Haug: Better question is, how does a company that provides a needed product and service like groceries to all go bankrupt?

Robinson: I think it's safe to say that Tops wouldn't be in its current predicament if its previous owners hadn't loaded up the company with debt. And sadly, it's not just Tops. Debt has helped drive lots of retailers into bankruptcy, and likely out of business, including Bon-Ton and quite possibly Toys R Us. Piling on debt in a competitive business that is getting even more competitive by the day is a prescription for disaster.

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