Kmart Grants Officers Big Loans Before Bankruptcy

Apr 17, 2002

Kmart Corp. gave more than $30 million in retention and relocation loans to top executives before it filed for bankruptcy-law protection, reports The Wall Street Journal. The discount retailer disclosed the payments in a more than 10,000-page financial-status document, filed Monday with the U.S. Bankruptcy Court in Chicago.

Compensation experts said the individual loan amounts were unusually high, including a previously reported $5 million loan to former chief executive Charles C. Conaway, and $3 million to Mark Schwartz, formerly the company’s president and chief operating officer. Only one of the five officers who received the largest retention loans, Cecil Kearse, is still with the company. The executive vice president of merchandising and a Kmart veteran of 28 years received a $2.5 million loan December 3.

In general, the loans were granted on the condition that executives remain with the company for several years, Kmart spokesman Jack Ferry says. Mr. Ferry adds that the loans are forgivable “under certain conditions,” such as with Mr. Conaway’s loan after his departure this past month.

Moderator Comment: Are forgivable loans, or personal loans of any kind, an acceptable use of a company’s assets? If no, what should and can be done to prevent this practice?

Let’s review the facts.

  • Consumers choose to shop anywhere but Kmart. A series
    of management teams turns the situation from bad to worse.

  • Kmart makes over $30 million in loans to top executives.
    Some or all of these loans are forgivable.

  • Kmart’s stock price tanks as the company’s investors
    take a hit.

  • Kmart files for Chapter 11 protection.

  • Former CEO Charles Conaway leaves Kmart. He is replaced
    by James Adamson.

  • Kmart vendors have a tough time getting paid.

  • Kmart closes stores and lays-off associates.

  • Kmart seeks approval to raise the CEO Adamson’s salary
    to $1.5 million from the previously agreed upon one-million-dollar figure.

  • The entire financial community scratches its collective

  • RetailWire Editor-in-Chief offers to take over the
    CEO position of Kmart for $333,000 in salary and moving expenses. He further
    recommends that:

    • The chain shutter at least half its stores.

    • Top management take a significant pay cut or goes

    • Kmart refocuses marketing and merchandising efforts
      on a single and blatantly obvious strategy.

    • The chain works with product and technology suppliers
      to finally get its logistics and operations act together.

    • Kmart explores the possibility of a sale to another

Anderson – Moderator

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