Large production builders have been evacuating markets with such regularity these days that it's easy to forget that such departures require a complex unraveling of assets and personnel that can take months, and considerable dollars, to complete without disruption.
A rare peek into one aspect of this process, holding onto and motivating employees who are charged with executing the exit plan but will, in all likelihood, be unemployed once it's done, reveals itself in a document that Kimball Hill Homes filed on June 4 with the U.S. Bankruptcy Court in Northern Illinois. This builder, which is currently reorganizing under Chapter 11, said in February that it would be out of Florida by year's end. It has presented, for court authorization, an incentive program for employees and managers who are helping the company wind down this division, which for the year ended Sept. 30, 2007 had $58.7 million in assets, and generated $89.5 million in sales with a pretax loss of 33.6 million. That fiscal year, the division's deliveries were off nearly 20 percent to 361 homes.
The document, filed on behalf of the Rolling Meadows, Ill.-based builder by its legal counsel Kirkland & Ellis and devised with assistance from the compensation consultant Towers Perrin, identifies 30 "key employees" who would participate in the incentive plan being proposed. That plan links payouts to customized targeted goals that each associate must meet. The targets revolve around the completion of homes in different subdivisions, punch-outs, and title transfers; as well as vendor and customer relations. Some targets are more financial or operational in nature. A few associates' targets relate to working with homeowner associations.
Kimball Hill estimates that the incentive plan would pay out about $833,000, and it breaks down those payments into two tiers: The first would pay associates between $2,599.53 to $80,000, depending on his or her years of service, base salary, and position, upon termination in semi-monthly installments. Tier 2 would be a lump-sum payment 15 days after their termination equal to two weeks pay per month of service during the wind-down for managers and one week of pay per month for other associates participating in the incentive plan. Kimball Hill states that Tier 2 payments would not exceed 28 percent of an employee's annual pay.
The builder is also seeking court approval to revise its management agreement with Francine Miller, Kimball Hill's Florida regional president. "The president of the debtors' Florida division is the cornerstone of the Florida wind-down," the filing states. "Without the Florida president, the Florida wind-down simply would fall apart. If the Florida president were to depart, the debtors believe that a significant number of key employees (and possibly the other management employees) would follow."
Under a contract she signed in July 2005, Miller was eligible to receive compensation for 2008 worth $1.05 million, which includes $325,000 in salary, $500,000 in bonuses, and $225,000 in severance if she were let go. In the new management agreement, Miller continues to receive the same salary through the end of this year. However, her bonus is adjusted to net proceeds from the sale of land and home closings during that period. Kimball Hill has set the target parameters for those sales at $10.5 million and $13.1 million, and Miller's bonus would fall somewhere between $300,000 and $450,000. By agreeing to this compensation package, she waives her rights to the guaranteed bonus and severance entitlement in her previous contract.
The company sees this change as equitable because its structure is in direct proportion to the value that Miller's efforts would generate for the company and its estates. Kimball Hill has also devised incentive packages for two other managers, whom it did not name, that are also based on net proceeds from the wind-down. However, in one case, the incentive is linked to the Florida division retaining 75 percent of its employees through the completion of the exit process.
All told, Kimball Hill estimates that the incentive plans and management agreements would cost $2 million.