Armstrong Deals With Management Retention

Lancaster, PA, December 14--The return of an old problem at Armstrong World Industries -- the exodus of management -- has prompted the company to return to its old solution -- big cash bonuses, according to the Lancaster New Era. Saying uncontrollable delays in its emergence from bankruptcy have triggered "critical losses of management," Armstrong wants to revert to paying retention bonuses next year. Armstrong, in a filing Thursday, is asking the U.S. Bankruptcy Court's approval to pay $9 million in bonuses to 130 key employees, if they stay at Armstrong through 2005. The bonuses "will serve not only to stabilize senior management but also will act as a necessary means to attract qualified new employees to fill vacant positions...," says Armstrong. "A 'revolving door' is inconsistent with good business," it adds in its 18-page filing. The bonuses would be 20 percent to 100 percent of an employee's annual base salary, depending on the risk of him leaving and the importance of his work. The average bonus would be $69,000. The proposed bonuses for management come as Armstrong is cutting 1,015 jobs, most of them hourly, here and nationwide to bolster sagging profits. The $9 million in bonuses would pay about six months of wages for the 450 workers who will be idled at the Lancaster floor plant. Lancaster-based Armstrong has faced this management-retention problem and proposed this remedy before. Armstrong, which filed bankruptcy in December 2000 to resolve asbestos-liability claims, in March 2001 said its uncertain future and tumbling stock price had triggered "a real crisis" of management attrition. Since a large part of Armstrong's management-incentive pay at that time had involved stock, the collapsing price of Armstrong stock had made those bonuses virtually worthless. Armstrong proposed, and the court approved, a three-part program to reward managers who stayed. The program contained: annual retention bonuses for 150 managers; extra severance for 195 managers if they're laid off during the bankruptcy; and extra payments for two dozen executives should Armstrong be sold and they leave "for good reason" within three years after the bankruptcy is over. In Thursday's filing, Armstrong says this three-part plan was "extremely successful," cutting voluntary management turnover to 4 percent a year. But in 2001, Armstrong had proposed the retention bonuses for just three years, figuring it would be out of bankruptcy in 2003, then would re-introduce stock-based bonuses. Unfortunately for Armstrong, the resignation of a federal judge who was to approve its reorganization plan, challenges by secured creditors to that plan and other issues have kept the company in bankruptcy. With no retention bonuses, no stock-based bonuses and continued uncertainty about its bankruptcy's progress, management turnover more than doubled to 9.6 percent through October of this year. "Action must be promptly taken before Armstrong's business suffers additional harm...," it says. "It is clear that the obvious benefits that will be realized from the (bonuses) completely justify the investment." The new retention bonuses would be slightly lower than the 2001 version, which were 30 to 110 percent of annual base salary. Armstrong did not explain the reduction. The retention bonuses would join two existing, performance-based cash bonuses, named the management achievement plan and the long-term incentive plan. In arguing for the need for the retention bonuses, Armstrong said its managers possess skills and knowledge that are crucial to the company "and, in many cases, impossible to replicate." When a manager leaves, Armstrong not only loses a valuable resource but incurs substantial expense to hire and train a replacement, the company says.

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