When Congress Says 'Pip Your Kerp': Performance Incentive Plans, Key Employee Retention Plans and, Chapter 11 Bankruptcy Resolution

Abstract

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) imposed severe restrictions on the adoption of Key Employee Retention Plans (KERPs) and favored the Performance Incentive Plans (PIPs) in Chapter 11. Examining pre-BAPCPA data, we find that, compared to plain-vanilla bankruptcies, those with a KERP contract exhibit longer bankruptcy resolutions but nevertheless with improved operating performance, whereas bankruptcies involving a PIP contract exhibit shorter Chapter 11 durations and even higher operating performance. We also find a positive share price reaction to the news of KERP or PIP adoption for those firms whose shares continue being traded after the bankruptcy filing. We find no association between KERP and/or PIP and the probability of reorganization in bankruptcy. An unintended consequence of the new Act appears to be a reduction in the efficiency of Chapter 11 resolutions through limitation of the type of contracts that creditors can offer to key employees of bankrupt firms.