After a key member of HHGregg’s leadership team died in 2012, his $40 million life insurance policy was paid out to the company and brought that year’s total earnings to $143.5 million. Now, senior managers on the HHGregg team say they should receive bonuses based on the total 2012 earnings, claiming that the life insurance policy propelled the company to an earnings level that warranted extra compensation for their work.
But during oral arguments before the Indiana Supreme Court on Thursday, Todd Kaiser, counsel for the retailer, told the justices that the intent of the company’s promise to pay out bonuses was based upon actual earnings garnered through company operations, not earnings from events such as the death of board chairman Jerry Throgmartin and the subsequent payout of his life insurance policy.
Kaiser urged the court to affirm the judgment of the Indiana Court of Appeals, which overturned a lower court decision in favor of the company managers and instead entered summary judgment in favor of HHGregg.
But Bryan Babb, who represented the managers, said the Marion Superior Court correctly decided that because the total rewards statement HHGregg distributed to 70 high-level employees said bonuses would be paid out if the company met its EBITDA targets, the managers were entitled to bonuses from the full $143.5 million.
The meaning of EBITDA was the main focus of Thursday’s oral arguments. The Fiscal Year 2012 EBIDTA earnings of $143.5 million included the $40 million life insurance policy, but without the policy, EBIDTA fell to just $103.5 million, below the threshold for bonuses.
Babb told the court that HHGregg tried to argue that it didn’t mean to base bonuses on EBIDTA, but rather on an “adjusted EBIDTA” that would not have included the insurance payout because it was a one-time, non-recurring event. But looking at previous company documents, Babb said the appliances and electronics retailer does have a history of removing one-time, non-recurring earnings from total EBIDTA, but did not specifically remove the insurance payouts.
Chief Justice Loretta Rush noted that HHGregg’s case would likely be stronger had the statement said “adjusted EBITDA,” but Kaiser further noted that the statement says bonuses will be based on “incentive EBITDA,” thus implying that the extra income would only be paid out for high performance.
Further, Justice Steve David implied that had EBITDA been more precisely defined to list what earnings could not be counted toward the bonuses threshold, the case likely would have never gone to court. But Kaiser said it is very difficult, if not impossible, to compile a complete list of all potential non-recurring items that would need to be withdrawn from the EBITDA total.
“You’d need a crystal ball,” he said.
But for adjusted EBITDA to apply, Babb said there has to be a finite list of circumstances that would alter the EBITDA total. That list exists here, he said, but “insurance proceeds” is not included.
Drawing a parallel between incentive bonuses and an elite baseball pitcher whose compensation increases as he wins more games, Kaiser told the court that the purpose of the EBITDA bonus had always been to award managers who increased sales or opened more stores, not to compensate them for tragic, one-time events beyond their control.
The case is Gregg Appliances, Inc. and HH Gregg, Inc. v. Dwaine Underwood, on behalf of himself and all others similarly situated, 49S02-1701-PL-00025. Oral arguments can be viewed here.