>From the APFA bulletin board.
Labor''s Loss; Carty''s Gain?
AMR CEO Don Carty recently announced that AMR management would forgo scheduled wage increases and has asked labor groups to do likewise. While this has a “we’re all in this together†feel, it hides the very real probability that AMR senior management could easily profit from labor’s concessions. How could that possibly happen? Simple: The pay increase management is forgoing applies only to their base salary, and senior management has plenty of other forms of compensation that far exceeds their base salary.
In 2001, Carty’s base salary comprised just 8.3% of his total compensation package. In 2000, his base salary represented just 4.7% of his total compensation and in 1999 it was just 5%. Truth be told, Carty will probably be freezing only 5-8% of his total compensation.
You see, at AMR the compensation for the most highly paid executives is really made up of stock options, restricted stock awards, bonuses and long term incentive plan (LTIP) payouts. These are the forms of income where senior management actually rakes in the big bucks, not their base salary. And Carty never happened to mention these other types of executive compensation in his announcement. Apparently, these extremely lucrative forms of executive pay are still very much in play.
And lucrative they are indeed. In 1999, Carty was awarded a stock options package valued at $10.3 million. In 2000, he was awarded an options package worth $12.5 million. Stock option awards are valued by multiplying the number of shares of the grant by the exercise price. The exercise price is determined by the average market price of AMR’s stock on the date the stock options are awarded.
The compensation committee could simply ladle out gobs of options at very advantageous prices to senior executives. These options could easily increase in value due in large part to the concessions of labor. All the while, management can claim they are in it with employees because their base salary is frozen. By the way, AMR’s compensation committee is made up of several board members one of whom is Michael Miles, a gentleman who sits on three boards with Don Carty at Dell, Sears and AMR.
The “long-term incentive plan†payout portion of Carty’s compensation is also very rewarding and absolutely dwarfs his base salary. Since 1997, Don Carty’s annual LTIP payouts have totaled an astounding $13.8 million. The compensation committee could continue their generous ways with the LTIP payouts while labor endures freezes or cuts.
And let’s not forget about bonuses. In 2000, Don Carty received a cash bonus of $1.35 million dollars for meeting that year’s financial targets. By snatching concessions from labor, it will make it much easier to hit financial targets that could trigger cash bonuses for Mr. Carty.
Then there’s the matter of what I like to call “backdoor†bonuses. You have to scour the Proxy report to find these. In 1999, Carty lost out on “the annual cash performance return payment†and, in 2000, he didn’t get a base salary increase, so the compensation committee bestowed him with an annual total bonus of two additional years of credited service for his pension plan every single year until he retires. Now, for every year Don Carty works at AMR, he gets three years of credited service for his pension, the one year he actually works and his two bonus years. The compensation committee could award such “backdoor†bonuses to make up for Carty’s “sacrificeâ€.
Now, if you are still inclined to give concessions at this time, but don’t want senior management to profit from them, what can you do? Well, before giving any concessions, demand the following concessions from senior management:
- Cancel all unexercised and unsold stock options held by senior management
- Halt the issuance of stock option awards to senior management
- Place a moratorium on all bonuses and long term incentive plan payouts
- All additional actions by the compensation committee (such as backdoor bonuses) must be approved by all those who had their wages frozen or made concessions
However, if you see concessions as wholly unnecessary, unfair and/or somewhat dubious, then you don’t have to worry about senior management enriching themselves on the backs of your pay and benefit cuts or freezes - as long as the majority of your colleagues feel the same.
Sources: AMR Proxy Filing for fiscal years 2001, 2000 and 1999;
Whitney Tilson of Tilson Capital Partners, LLC, New York City
Labor''s Loss; Carty''s Gain?
AMR CEO Don Carty recently announced that AMR management would forgo scheduled wage increases and has asked labor groups to do likewise. While this has a “we’re all in this together†feel, it hides the very real probability that AMR senior management could easily profit from labor’s concessions. How could that possibly happen? Simple: The pay increase management is forgoing applies only to their base salary, and senior management has plenty of other forms of compensation that far exceeds their base salary.
In 2001, Carty’s base salary comprised just 8.3% of his total compensation package. In 2000, his base salary represented just 4.7% of his total compensation and in 1999 it was just 5%. Truth be told, Carty will probably be freezing only 5-8% of his total compensation.
You see, at AMR the compensation for the most highly paid executives is really made up of stock options, restricted stock awards, bonuses and long term incentive plan (LTIP) payouts. These are the forms of income where senior management actually rakes in the big bucks, not their base salary. And Carty never happened to mention these other types of executive compensation in his announcement. Apparently, these extremely lucrative forms of executive pay are still very much in play.
And lucrative they are indeed. In 1999, Carty was awarded a stock options package valued at $10.3 million. In 2000, he was awarded an options package worth $12.5 million. Stock option awards are valued by multiplying the number of shares of the grant by the exercise price. The exercise price is determined by the average market price of AMR’s stock on the date the stock options are awarded.
The compensation committee could simply ladle out gobs of options at very advantageous prices to senior executives. These options could easily increase in value due in large part to the concessions of labor. All the while, management can claim they are in it with employees because their base salary is frozen. By the way, AMR’s compensation committee is made up of several board members one of whom is Michael Miles, a gentleman who sits on three boards with Don Carty at Dell, Sears and AMR.
The “long-term incentive plan†payout portion of Carty’s compensation is also very rewarding and absolutely dwarfs his base salary. Since 1997, Don Carty’s annual LTIP payouts have totaled an astounding $13.8 million. The compensation committee could continue their generous ways with the LTIP payouts while labor endures freezes or cuts.
And let’s not forget about bonuses. In 2000, Don Carty received a cash bonus of $1.35 million dollars for meeting that year’s financial targets. By snatching concessions from labor, it will make it much easier to hit financial targets that could trigger cash bonuses for Mr. Carty.
Then there’s the matter of what I like to call “backdoor†bonuses. You have to scour the Proxy report to find these. In 1999, Carty lost out on “the annual cash performance return payment†and, in 2000, he didn’t get a base salary increase, so the compensation committee bestowed him with an annual total bonus of two additional years of credited service for his pension plan every single year until he retires. Now, for every year Don Carty works at AMR, he gets three years of credited service for his pension, the one year he actually works and his two bonus years. The compensation committee could award such “backdoor†bonuses to make up for Carty’s “sacrificeâ€.
Now, if you are still inclined to give concessions at this time, but don’t want senior management to profit from them, what can you do? Well, before giving any concessions, demand the following concessions from senior management:
- Cancel all unexercised and unsold stock options held by senior management
- Halt the issuance of stock option awards to senior management
- Place a moratorium on all bonuses and long term incentive plan payouts
- All additional actions by the compensation committee (such as backdoor bonuses) must be approved by all those who had their wages frozen or made concessions
However, if you see concessions as wholly unnecessary, unfair and/or somewhat dubious, then you don’t have to worry about senior management enriching themselves on the backs of your pay and benefit cuts or freezes - as long as the majority of your colleagues feel the same.
Sources: AMR Proxy Filing for fiscal years 2001, 2000 and 1999;
Whitney Tilson of Tilson Capital Partners, LLC, New York City
