Armstrong to Cut Retention Bonuses 60% in 2006

Lancaster County, PA, December 27, 2005--Armstrong World Industries wants to eliminate next year's annual retention bonuses for about two-thirds of the employees it’s rewarding this December, apparently as a belt-tightening move, according to the Lancaster New Era. Armstrong last week asked U.S. Bankruptcy Court to approve another year of the bonuses, saying they’re a crucial tool for keeping essential top managers. Yet at the same time, the Lancaster-based manufacturer noted that the “streamlined” 2006 edition of the bonuses “represents a significant reduction” in the total payout. Armstrong proposes spending $3.5 million in retention bonuses for 60 key managers next year, compared to $8.6 million for 190 key managers this year. In other words, Armstrong next year would spend only 40 percent of what it’s spending this year. The year-end retention bonuses give managers a cash payment, ranging from 20 to 100 percent of their base salary, as a reward for staying at Armstrong for the year. “In formulating the 2006 Cash Retention Program, Armstrong has been fully cognizant of the costs involved and has worked to assure that the goals of the program can be attained in an economic and reasonable fashion,” the company said. The company did not disclose in its public filing which categories of managers would remain in the retention program, though Armstrong did share that with representatives of its creditors and offered the information to the court. The company did note that chairman and chief executive officer Michael D. Lockhart “declined participation” in both the 2005 and 2006 retention programs. Armstrong needs the court’s approval of the bonuses because firms in bankruptcy need such authorization to take on a new and significant expense. The retention bonuses are separate from incentive bonuses Armstrong pays to key managers as a reward for achieving exceptional business results. Armstrong won the court’s blessing in late September to continue the incentive programs for 250 managers. The downsized retention bonuses come as Armstrong is struggling financially. For the nine months ended September. 30, operating profits (excluding a one-time charge) fell 27 percent. In its 18-page filing, Armstrong said its “operational and financial performance” was among the factors considered in devising the 2006 program. Armstrong also studied the cost of earlier versions of the bonus program, the impact of key managers leaving, and pay for comparable jobs at other firms. Cost issues aside, Armstrong emphasized in its filing that the retention bonuses help the firm avoid the pervasive damage that results from managers leaving. Keeping its key managers helps Armstrong preserve and enhance the value of its business, and proceed through the bankruptcy reorganization process, the firm said. When one leaves, Armstrong said, attracting a competent replacement is difficult, time-consuming and expensive, due in part to the uncertainty surrounding Armstrong in light of its bankruptcy. The retention bonuses have proven themselves as an effective tool for lessening the turnover problem, the company said. Armstrong first asked the court to approve the retention bonuses in early 2001, saying its entering bankruptcy the year before had caused a “real crisis” of management turnover. Initially the bonuses were approved for 2001-03, as Armstrong expected to emerge from bankruptcy by late 2003. That didn’t happen, and Armstrong’s management turnover doubled to 8 percent in 2004. Armstrong resumed paying the retention bonuses in 2005, with the court’s approval, trimming management turnover to 2.6 percent in the first nine months of this year. Citing those turnover statistics, Armstrong described the retention bonuses as “a necessary and cost-effective measure...(that) represents a sound investment that will reap substantial returns and benefits.”

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