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Bankrupt Apple Supplier GT Advanced Technologies Wants to Give Performance Incentives

By Jamal Carnette, CFA - Jan 2, 2015 at 1:56PM

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GT Advanced Technologies calls these proposed cash bonuses performance-driven incentives, but why not pay top employees in company stock?

Source: GT Advanced Technologies.

Failure must be rewarded, lest it never be attained again. Pardon the sarcasm, but that appears to be GT Advanced Technologies' (NASDAQOTH: GTATQ) rationale for its bonus program. How do we know the company plans to hand out bonuses -- excuse me, performance-driven initiatives? Because the company had to file documents to receive permission from a bankruptcy court for the expenditure after filing for Chapter 11 bankruptcy protection in October (and losing over 95% of shareholder value in the process). As an added snub to shareholders, the company plans to give cash bonuses instead of stock.

For those not following the story, GTAT is a cautionary tale of poor management, overpromising, and underdelivery. The company started out 2014 on fire thanks to a contract with Apple for possible sapphire manufacturing for the the tech giant's phones and Apple Watch, running the stock up from nearly $8 to $18, before sinking into bankruptcy protection. Fellow Fool Evan Niu provides more detail on the sapphire contract, which was heavily slanted in Apple's favor. The end result was a company that stretched itself too thin and was unable to handle its obligations.

Actually, the company plans to pay up to three bonuses
According to Apple Insider, GTAT asked the court to approve three incentive plans: a key employee incentive plan, or KEIP, for senior management and insiders; a key employee retention plan, or KEMP, for noninsiders; and a management incentive plan, or MIP, for employees not included in the other two programs. Overall, the total amount of the payouts could be as much as $5.6 million, not counting a discretionary pool, according to Apple Insider.

For perspective, the company's market capitalization is presently only $47 million. It should also be noted the previous bonus policy included giving out company stock, but now GTAT finds its stock to be no longer sufficient given the bankruptcy filing. Also, there are more than 800 former employees who no longer qualify for any incentive because they no longer have jobs with the company thanks to management's prior poor choices that landed the company in bankruptcy court.

Ever heard of agency risk?
One of the basic risks investors face is agency risk. Although it can manifest itself in many decisions, the underlying theme is simple: Can you trust a company's management with your money? In this case, should managers receive cash incentives while many shareholders are left with pennies on their initial investment?

According to the filing, GT thinks this is an acceptable move because these incentives will cause management's interests to be aligned with shareholders' interests  -- although stock options and grants that would truly align the two are shunned for cash payouts. And let's not forget that management already has a duty to its shareholders and shouldn't need performance incentives to be effective stewards of your money.

Furthermore, as an Apple shareholder, I want to ensure my company is being fully compensated with interest before GTAT's management pays bonuses. Right now, the conditions stipulate a return of the $439 million prepayment over four years without any interest. In fact, a stakeholder of any GTAT creditor should want compensation before the company pays cash bonuses -- after all, any company taking a less-than-full settlement is essentially subsidizing GTAT's KERP, KEIP, and MIP bonuses.

To be fair, I understand GTAT's stated rationale for these incentives. Key workers and management who feel they aren't properly compensated may leave, and take their skills along with them. Ultimately, if the company loses all its talent, it will be unable to provide any future return for shareholders. In addition, I understand that past bonuses and incentives were paid in stock and are now essentially worth nothing, hurting management's net worth. That said, taking stock now would signify management's desire to preserve shareholder value throughout this process and fully align their interests.

Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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