Compensation Blues Costing American Air Executives

[orwell]

Compensation blues costing American Air executives
Tuesday December 2, 4:06 pm ET
By Jon Herskovitz

DALLAS, Dec 2 (Reuters) - American Airlines is finding it hard to get some of its top executives to sit down and enjoy the ride past the brink of bankruptcy to a more stable financial future.

American has been hit by the loss of several leaders over the past few months, with a highlight being the decision of Chief Financial Officer Jeff Campbell last month to become CFO of drug distributor McKesson Corp. (NYSE:MCK - News).

The world's largest airline, a unit of AMR Corp. (NYSE:AMR - News), is facing the same sharp revenue drop that hit the industry after the Sept. 11, 2001 attacks and led to wage cuts at several major carriers.

American, which narrowly avoided bankruptcy in April, is still picking up the pieces from a flap over executive pensions and retention bonuses that cost former Chief Executive Don Carty his job earlier this year.

Apart from its CFO, American has also recently lost Jane Allen, a vice president of in-flight services; Anne McNamara, former general counsel; and other senior managers. Campbell had been CFO only since June 2002, when he replaced Thomas Horton, who left for AT&T Corp.

People familiar with the executive pay structure at American have said that compared to other companies, compensation is on the low end and stress is on the high end.

The airline's workers have little sympathy for the top executives' salary plight when thousands of unionized jobs have been cut and and their pay slashed in a restructuring.

American has launched a massive restructuring aimed at cutting operating costs by $4 billion a year.

"The board at AMR is not going to be in the mood to give top executives special bonuses or favors to get them to stay," said Austan Goolsbee, a professor of economics, University of Chicago Graduate School of Business.

Goolsbee, an expert on executive compensation, said a board of directors is under additional pressure and scrutiny to keep executive pay down when times are bad.

Even though AMR reported a slim third-quarter profit, some industry experts believe the airline is not out of the woods and still has a way to go to before it can be competitive with lower-cost rivals.

There is even more pressure at American because of the flap over executive pensions and retention bonuses that were revealed earlier this year just as rank-and-file workers were voting on new labor deals that would cut their pay by about 16 percent to 23 percent, he said.

As a result, those executives who are able to leave for greener pastures, are taking the chance to do so, Goolsbee said, adding that it may be tough for them to land jobs at other cash-strapped carriers.

AMR Chief Executive Gerard Arpey made it a point when he took over in April that he would not accept some of the perks that cost his predecessor Carty his job. Arpey has also said that American has a deep and talented management pool from which to find successors.

"All employees of the company took a salary cut of one form or another," airline spokesman Al Becker said.

"There are just limits to what the company can do to retain extremely talented people. This presents something of a dilemma for us," Becker said

 

[jimntx]

Boo-Frickin-Hoo!

 

[WingNaPrayer]

Boo-Frickin-Hoo!

What an appropriate response to that long winded hack job, it made me giggle!


Unfortunately, and shame on me of all people for saying this, but a mass exodus at the executive level right now would not be a good thing. There would be no one left who knows where all the bodies are buried. A carrier that is struggling financially doesn't need it's key players who hold all the secrets putting them in a box and heading out the door.

Arpey has made a bit of a mistake, aluring to the fact that basically, if you don't want the job, hit the road I've got a pool of thousands of managers I can choose from to replace you. Not good executive thinking. If your CEO don't care, then why should anyone else? And when no one else cares, all of the suffering gets heaped on labor and then it becomes too late to draw a line of any kind.

 

[SWORD]

This is a very real problem, and not just at the exec level. Many mid-level managers have left because they are being offered 30-100% increases outside the airline business (or sometimes even in the business). Yes, AA management is THAT underpaid. You don't have to like it, you just have to internalize it. These are skilled people that are in demand (even in a recession) precisely because they are sharp with good instincts and are valued for their decision-making abilities among other things.

It's easy to say boo-frickin-hoo, but Wing N Prayer is right. Now is not the time for us to lose the management pool that, prior to the current ugly downturn, led us to the top of the heap. Jeff Campbell was a serious loss, all you'd have to do is reflect on how adroitly he got us through last March and April when we were, to borrow a word, perilously close to going over the edge.

You all may not realize it, but this could be a serious problem down the road. It won't hurt for a couple of years, but then it will really hurt bad. This problem, more than anything, threatens our future. Just think about this: who's going to replace these people? Castoffs from when USAirways hits the deck? Will that make you feel more comfortable? Not me...

 

[tadjr]

Just think about this: who's going to replace these people? Castoffs from when USAirways hits the deck? Will that make you feel more comfortable? Not me...

Why wait for that? You can have ours now.

 

[jimntx]

It's easy to say boo-frickin-hoo, but Wing N Prayer is right. Now is not the time for us to lose the management pool that, prior to the current ugly downturn, led us to the top of the heap. Jeff Campbell was a serious loss, all you'd have to do is reflect on how adroitly he got us through last March and April when we were, to borrow a word, perilously close to going over the edge.

You all may not realize it, but this could be a serious problem down the road. It won't hurt for a couple of years, but then it will really hurt bad. This problem, more than anything, threatens our future. Just think about this: who's going to replace these people? Castoffs from when USAirways hits the deck? Will that make you feel more comfortable? Not me...

It's easy to say boo-frickin-hoo because I know that most of the "we can't afford to lose management" cry is nothing but management-promoted BS. When I taught in the Graduate School of Management at Rice University (as an adjunct) there was a study done that showed that loss of management personnel is only temporarily troubling to a company and then ONLY if the lost manager was a capable employee. Loss of management personnel whose strongest trait is derriere osculation is of no effect whatsoever. Those people (and they are legion at AMR) can be replaced in 10 minutes.

What REALLY hurts an organization is loss of skilled, experienced workers. There is a phenomenum called corporate memory. The short explanation is that corporate memory is the knowledge of how the job is really done, not what the policy is. It exists in every organization. Most of the AMR managers I've ever met can quote you policy til the cows come home. They are clueless as to how the job gets done. It's the pilots and the flight attendants and the agents and the rampers who are the custodians of the corporate memory. AMR seems to be doing everything in its power to drive off the experienced people in these categories. This is the real long-term threat to the company.

Oh, and what got us through March and April was the lenders being willing to wait and see if the company's rape of the unions' contracts was successful. After all they knew that if AMR went into bankruptcy they had no chance of recouping their debts in full. If the rape was successful they, at least, had a chance of getting paid.

 

[orwell]

Oh, and what got us through March and April was the lenders being willing to wait and see if the company's rape of the unions' contracts was successful. After all they knew that if AMR went into bankruptcy they had no chance of recouping their debts in full. If the rape was successful they, at least, had a chance of getting paid.

And, if chapter 11 had occurred, the "rape" would have turned to a candlelit dinner and gentle lovemaking on satin sheets, right? Good point!

You're right about the difference between policy and how a job is really done. You should remember, though, that not everyone in management is detached from the reality of how things operate. Many have "nuts and bolts" experience and went on to mgmt. positions. Just like with labor, there are good and useless members of the work group.

 

[Hopeful]

What I see on the horizon is Arpey's way of preparing us that in order for American to continue on the path to profitability, we are eventually going ot have to offer higher compensation to these already overpaid executives. Arpey's reasonong will be, "Hey, we're losing people to United who is in Bankruptcy and paying there executives more!" We're the shmucks locked into this debacle of a contract while the excutives and the rest of the management are not.

 

[KCFlyer]

Hmmmm - I've gone round a bit when some folks imply that a pilot who is paid less is somehow less qualified than a pilot who is paid more. Same holds true with managment - where is it written that the "quality" of an executive's talent is directly related to the size of his paycheck?

If an executive wants to leave the airline industry and take up managing a garbage disposal company - let him go. Focus on finding someone whose passion for the industry and the company is greater than his passion for a high 6 figure salary. Hard as it might be to believe, it's possible to live quite nicely for just a hundred grand a year in Fort Worth. Anything higher is positively upscale.

As far as "castoffs" from another airline - seems that's part of the problem. Steven Wolf left UAL in peachy shape , then went on to work his "magic" over at US. Got paid pretty well for that, too. But he was considered "talented" management. Is that what AA wants to retain???

If part of the job means knowing "where the bodies are buried", then how valuable were those bodies in the first place and is resurrecting them going to make things better?

I don't think labor has a real problem with midmanagement, other than sometimes the layers of middle managment can become a tad too thick. But they need executives at the highest level to put a little skin in the game with labor. They need to leave the boardroom once in a while and watch (or heaven forbid - help) a gate agent handle a delayed flight, or help a ramper load the bins in the belly. And more importantly - LISTEN to what they tell you. I would imagine that more than a few might actually have some ideas that weren't considered by the all knowing MBA's in the executive suite. A lot of the cost saving ideas at Southwest came from the front line employees - and not thru some silly "suggestion box" that gets overlooked at every company that has one, but by management actually listening to the suggestion.

I've watched a managment training video from Southwest. In it, Herb said that he doesn't want managers - he wants LEADERS. But it seems that most business (not just the major airlines) does it's damnedest to drive a wedge between management and labor. And by golly - they need talented management. But what they really need is talented leadership. A leader has to lead...and a leader can lead by LISTENING to his/her subordinates. Tell the managers who want to bail for a higher paycheck somewhere else to hit the road. Then look beyond the textbook educated applicants who couldn't tell jet-A from av-gas and find someone who has a passion for the industry. My bet is - they'll do a far better job for a paycheck that is worlds apart from that demanded by the rest of the "talent pool".

 

[orwell]

If an executive wants to leave the airline industry and take up managing a garbage disposal company - let him go. Focus on finding someone whose passion for the industry and the company is greater than his passion for a high 6 figure salary. Hard as it might be to believe, it's possible to live quite nicely for just a hundred grand a year in Fort Worth. Anything higher is positively upscale.

What you said is exactly what I wish could happen. I always wonder, when reading some of the hate messages posted by union members: "If you hate this job so much, why don't you go somewhere where you aren't being exploited?"

Yet, the same standard should be applied to mgmt. If someone is going to jump ship at the next best offer, as you point out, that certainly isn't an indication of a loyal employee. It is rather sad to think that all employees - both union and mgmt. - are nothing but mercenaries, with no care for their company other than getting as much money out of it before they or it die.

On the other hand, this is a capitalist system, and these are principles of a free market. Would you stay at your job if offered more elsewhere? As much as I agree with your sentiments, do you think it's realistic to expect that kind of selflesness? Personally, I could live more than quite nicely on 100K a year, but I guess it takes more than that to make some people tick.

 

[jimntx]

Hmmmm - I've gone round a bit when some folks imply that a pilot who is paid less is somehow less qualified than a pilot who is paid more. Same holds true with managment - where is it written that the "quality" of an executive's talent is directly related to the size of his paycheck?

If an executive wants to leave the airline industry and take up managing a garbage disposal company - let him go. Focus on finding someone whose passion for the industry and the company is greater than his passion for a high 6 figure salary. Hard as it might be to believe, it's possible to live quite nicely for just a hundred grand a year in Fort Worth. Anything higher is positively upscale.

As far as "castoffs" from another airline - seems that's part of the problem. Steven Wolf left UAL in peachy shape , then went on to work his "magic" over at US. Got paid pretty well for that, too. But he was considered "talented" management. Is that what AA wants to retain???

If part of the job means knowing "where the bodies are buried", then how valuable were those bodies in the first place and is resurrecting them going to make things better?

I don't think labor has a real problem with midmanagement, other than sometimes the layers of middle managment can become a tad too thick. But they need executives at the highest level to put a little skin in the game with labor. They need to leave the boardroom once in a while and watch (or heaven forbid - help) a gate agent handle a delayed flight, or help a ramper load the bins in the belly. And more importantly - LISTEN to what they tell you. I would imagine that more than a few might actually have some ideas that weren't considered by the all knowing MBA's in the executive suite. A lot of the cost saving ideas at Southwest came from the front line employees - and not thru some silly "suggestion box" that gets overlooked at every company that has one, but by management actually listening to the suggestion.

I've watched a managment training video from Southwest. In it, Herb said that he doesn't want managers - he wants LEADERS. But it seems that most business (not just the major airlines) does it's damnedest to drive a wedge between management and labor. And by golly - they need talented management. But what they really need is talented leadership. A leader has to lead...and a leader can lead by LISTENING to his/her subordinates. Tell the managers who want to bail for a higher paycheck somewhere else to hit the road. Then look beyond the textbook educated applicants who couldn't tell jet-A from av-gas and find someone who has a passion for the industry. My bet is - they'll do a far better job for a paycheck that is worlds apart from that demanded by the rest of the "talent pool".

Can I have an AMEN from the choir!

The bloated compensation of the average U.S. executive is a scandal. Look at the statistics. 15 years ago, the average CEO in the U.S. made something like 400 times the average annual salary of his employees. Today, it's something like 4000 times the average annual salary. Is there anyone out there who thinks that companies (especially AMR) are being managed 100 times better today? Is the bottom-line performance of any of these companies 100 times better?

As to your insightful statement about LEADERS...
When I was in the Information Technology Department at Texaco, there was a female manager who was a true leader. Her employees would have followed her off the roof of the building if she jumped--needless to say, she was not liked by most of the Theory X managers who predominated. I asked her one day why she thought her employees worshipped her. Her response was "I think that my employees began to follow my lead the day that I realized that they knew how to do their jobs better than I--that my job was to run interference for them; to fight the "political" battles for them; to see that they had the tools they needed; and otherwise to get the hell out of their way." Now is that a leader or what?!

P.S. If there is anyone out there who is unfamiliar with the term Theory X manager. This is the manager whose philosophy is "You do what I say, when I say, because I said it." And, who believes that he/she must stand over the employees every second or they "won't do it right."

 

[orwell]

P.S. If there is anyone out there who is unfamiliar with the term Theory X manager. This is the manager whose philosophy is "You do what I say, when I say, because I said it." And, who believes that he/she must stand over the employees every second or they "won't do it right."

I think the integrity of the leader is more important than their style. Certainly there can be effective and honorable "theory X" leaders. If I'm not mistaken, judging by your description of it, the military runs on that style of leadership. And of course there are good and bad leaders there just like in companies.

Certainly I agree the micromanaging and breathing down the necks of people doing their jobs is ineffective and more an indication of paranoia and/or ego mania, but on the other hand you can't run company as a complete democracy.

If everyone got to vote themselves a paycheck, you'd be out of business pretty soon, because everyone thinks they're the most important part of the company.

Well, not everyone - some of us our honest enough to realize they're not, but many are not.

 

[KCFlyer]

As much as I agree with your sentiments, do you think it's realistic to expect that kind of selflesness? Personally, I could live more than quite nicely on 100K a year, but I guess it takes more than that to make some people tick.

Yes - it exists. I'll use a local KC company that is fairly large - Garmin International. They make GPS systems and Avionics. The two founders of the company still work there as Co Chairmen, and one is also the CEO. The company is wildly successful (The CEO is one of the Wealthiest people in the US). Let's look at the compensation package of their top executives:

Min H. Kao - CEO - Cofounder - 1990
Annual Compensation - $240,145
Long Term Incentive - $0.00
All Other - $20,146
Total 2002 Compensation - $260,291

Gary Burrel - Co Chairmen Co-Founder - 1990
Annual Compensation - $217,825
Long Term Incentive - $0.00
All other - $18,039
Total 2002 Compensation - $235,864

Andrew Etkind - General Counsel & Secretary - since 1998
Annual Compensation - $195,357
Long Term Incentive - $0.00
All Other - $19,606
Total 2002 Compensation - $214,963

Kevin S Rauckman - CFO - since 1999
Annual Compensation - $160,208
Long term incentive - $0.00
All Other - $18,775
Total 2002 Compensation - $177,705

Gary V. Kelly - Director of Marketing since 1992
Annual Compensation - $146,305
Long Term Incentive - $0.00
All other - $18,775
Total 2002 Compensation - $165,080

This company is quite successful. The pay their "line" workers a very competitive wage - most who work their live in Johnson County, KS - which has a per capita income of over $43,000 (as of 2000). So it's reasonable to assume that the pay is fair. And - many of my neighbors work there and live in a neighborhood of $200+ thousand homes, so pay might even be considered to be a bit more than "fair". It is a growing company - they currently have about 1,600 employees and they continue to hire, even in a "down" economy, and it's stock price has doubled over the last year. So these guys must be doing something right - either that, or a bunch of idiots (based on their "Low" pay) are at the helm of a wildly successful company. And the reason that they stay has got to be for something more than money. Maybe it's a "passion" for technology. I'm sure that AA would like to have some guys who have such a "proven" track record in their ranks. So...bottom line, yep...there really are some execs like that in this world.

 

[JS]

If you can find someone who has the requisite financial knowledge (most rampers don't) and is willing to deal with the press 24/7 (most flight attendants don't) and is skilled at striking a balance between good labor relations and reasonable labor costs and is willing to do this job for only $100,000 a year, go for it.

I would be happy to be CEO of AMR for $100,000 a year, but you probably don't want me to be CEO, because I will do my damnest to rake over the coals and then fire every union employee who generates customer complaints. That's not good for the labor relations part of the job requirements, is it?

I'm not defending upper management who makes thousands of times the salary of the rank-and-file. That's extreme. However, saying that any old union employee is capable of being CEO, or that there exists someone else out there who can meet the job requirements I listed above for only $100,000 a year is just unrealistic.

 

[orwell]

Yes - it exists. I'll use a local KC company that is fairly large - Garmin International. They make GPS systems and Avionics. The two founders of the company still work there as Co Chairmen, and one is also the CEO. The company is wildly successful (The CEO is one of the Wealthiest people in the US). Let's look at the compensation package of their top executives:

Min H. Kao - CEO - Cofounder - 1990
Annual Compensation - $240,145
Long Term Incentive - $0.00
All Other - $20,146
Total 2002 Compensation - $260,291

Gary Burrel - Co Chairmen Co-Founder - 1990
Annual Compensation - $217,825
Long Term Incentive - $0.00
All other - $18,039
Total 2002 Compensation - $235,864

Andrew Etkind - General Counsel & Secretary - since 1998
Annual Compensation - $195,357
Long Term Incentive - $0.00
All Other - $19,606
Total 2002 Compensation - $214,963

Kevin S Rauckman - CFO - since 1999
Annual Compensation - $160,208
Long term incentive - $0.00
All Other - $18,775
Total 2002 Compensation - $177,705

Gary V. Kelly - Director of Marketing since 1992
Annual Compensation - $146,305
Long Term Incentive - $0.00
All other - $18,775
Total 2002 Compensation - $165,080

This company is quite successful. The pay their "line" workers a very competitive wage - most who work their live in Johnson County, KS - which has a per capita income of over $43,000 (as of 2000). So it's reasonable to assume that the pay is fair. And - many of my neighbors work there and live in a neighborhood of $200+ thousand homes, so pay might even be considered to be a bit more than "fair". It is a growing company - they currently have about 1,600 employees and they continue to hire, even in a "down" economy, and it's stock price has doubled over the last year. So these guys must be doing something right - either that, or a bunch of idiots (based on their "Low" pay) are at the helm of a wildly successful company. And the reason that they stay has got to be for something more than money. Maybe it's a "passion" for technology. I'm sure that AA would like to have some guys who have such a "proven" track record in their ranks. So...bottom line, yep...there really are some execs like that in this world.

Well, they're rich by my standards, but compared to the typical US executive, you're right about their pay being "low."

Of course, being in a smaller company - that you had a hand in creating - tends to add some motivational factors that transcend financial compensation. If AA and other legacy carriers could get that "entrepreneurial" culture to take root across the company - the feeling that you're working for your own success, and not just a mercenary - most of the battle would be won.