The Right Thing Is Costing Arpey Millions A Year

orwell

Advanced
Nov 21, 2003
151
0
Posted on Sun, May. 09, 2004



The right thing is costing Arpey millions a year

By Mitchell Schnurman
Star-Telegram Staff Writer


Gerard Arpey



Gerard Arpey is doing something extraordinary with executive pay: the right thing.

The CEO of American Airlines is making less money than a utility infielder, and he hasn't received a bonus for three years. That's fitting, many would say, because American lost $6.5 billion during the same time and barely escaped bankruptcy.

What's unusual is that Arpey isn't getting a big stake in American's upside, either.

That can't go on for long, not with American executives being lured away for boatloads of money. One former financial officer, Tom Horton, made six times more than Arpey last year -- and he's not even the top dog at struggling AT&T.

First, let's talk about the way that Arpey is scoring big credibility points with employees.

When CEOs take a pay cut for the good of the company, they almost always load up on stock options or stock grants. Then if the turnaround takes and the stock price zooms, the leaders get a huge payday.

That's how most troubled companies recruit top leaders or hold on to them.

But after Arpey took a pay cut last year, he also took no stock options -- zero. Yet he won options for his top lieutenants, saying they were necessary for retention. And every other employee got some, too.

Arpey said he couldn't take shares and look workers in the eye, not while American was struggling and everyone was sacrificing.

"It just didn't feel right," Arpey said last week.

Smart move, reminiscent of Lee Iacocca taking a $1 salary to lead Chrysler out of financial ruin.

"I'd do that if I could, but I can't live on a dollar," said Arpey, a 45-year-old who has been at American for his entire career, 22 years, and is raising a young family in Colleyville.

The gesture has helped him win over employees, after they felt burned by his predecessor, Don Carty. Carty was the chief architect of a scheme to pay retention bonuses and protect the pensions of senior executives. The secret plans were adopted while management was pressing for record concessions from American's labor unions.

When the plans came to light, American's reorganization almost unraveled, forcing Carty to resign. Arpey had to do a lot to restore some trust, and he's been walking the walk ever since.

The pay package, released publicly two weeks ago, is one of the clearest external signs.

His salary dropped to $535,275. That's almost 8 percent less than the year before, when he held the No. 2 job. Carty was paid $811,125 in 2002.

That means American is saving plenty on its CEO's salary. According to a national survey by United for a Fair Economy, the average CEO was paid 281 times the average worker in 2002; Arpey got less than 10 times the average pay at American last year -- a reflection of the company's troubles and Arpey's approach.

Arpey also got $151,000 in a long-term payout in '03, stemming from an incentive plan set up two years earlier.

That's everything, according to the proxy statement. No bonus, no options, no "other" -- a catch-all category that often includes car allowances, country club memberships, life insurance, even financial advice.

The pay package is roughly the same size as James Parker's, the CEO of Southwest Airlines. Parker also got 13,000 stock options last year, a small number for a top executive.

Most of Arpey's peers did better. David Siegel, who recently resigned as the head of US Airways, received a severance package of about $5 million. If he had stayed, he was in line to get 8.3 million shares of restricted stock -- his piece of US Air's upside.

Siegel's salary and bonuses in '02 and '03 were also higher than Arpey's pay.

Glenn Tilton at United has a small salary by CEO standards, about $746,000 last year. But he got a $3 million signing bonus to join the company in 2002, when he tried to stave off bankruptcy; today Tilton is trying to get United out of Chapter 11.

When James Carreker was named CEO of the Bombay Co. last year, he took no salary. Instead, he took restricted shares in the Fort Worth retailer worth $750,000. He also got 400,000 stock options -- again, his piece of the upside.

Arpey hasn't commented on whether he'll take options this year, and American's board isn't scheduled to discuss it until July. The matter will require some deft handling.

Employees, in general, are pleased with Arpey's pay restraint, as well as his efforts to improve communication. But the low pay is creating an expectation: Many employees think they ought to get theirs -- some givebacks or pay increases -- before executives get any raises.

Sounds fair, except it ignores the market reality. American executives can transfer their skills to other companies, even other industries, and make significantly more money. That's especially true with Arpey, trained in American's finance department.

Not so with union workers, whose pay is based on seniority. If they switch airlines, they start at the bottom of the ladder.

This isn't just a theory. Many American managers, including officers, have jumped at better financial offers in the past few years, and headhunters have been raiding the place for months.

Performance pay is also a big part of executive compensation. While the rank and file have the chance to earn profit-sharing and gains on options, the bulk of their pay remains salary.

Executives, in contrast, are supposed to earn most of their money from a rising stock price and stronger company performance. That can't happen if Arpey isn't getting options or other grants.

Shares also serve as handcuffs, a way to keep executives around. But nearly all of Arpey's options are underwater; the total value of his in-the-money options at the end of 2003 was $13,794.

Blame that on the company's weak performance, to be sure. But the bottom line is, that isn't enough money to deter anyone from taking a better job.

Eventually, Arpey has to be paid the market rate. Horton's package is a good example of what's out there for a top recruit from American.

Horton joined AT&T in June 2002 as its chief financial officer, the same position he held at American.

Last year, Horton got nearly $3.3 million. For the last six months of 2002, he was paid $4.7 million.

Other details from AT&T's latest proxy statement: Horton is guaranteed at least $975,000 a year in salary and bonus. He got a $1 million signing bonus, plus $1.4 million in relocation expenses to New Jersey.

He gets $375,000 in retention bonuses -- those thorny things that led to Carty's demise -- in both 2003 and 2004.

Finally, there's his piece of the upside: Horton received 1 million stock options in the past two years.

Arpey might say he doesn't need that much money, and that's admirable. But the market is saying otherwise, and eventually, employees and directors at American will have to come to grips with it.


--------------------------------------------------------------------------------
Mitchell Schnurman's column appears Wednesdays and Sundays. (817) 390-7821 [email protected]





--------------------------------------------------------------------------------

© 2004 Star Telegram and wire service sources. All Rights Reserved.
http://www.dfw.com
 
I CAN'T WAIT to hear the spin that WingNAPrayer puts on this one!

By the way, the folks over at another board got so sick of his/her anti AA/Management spin, the BANNED him/her :up:

Edited to add the board: www.flyertalk.com
 
Yes, there will be the naysayers, but give Arpey credit for trying to change the culture. Who knows, he may fail, but trying to do the right thing is usually rewarded in some way or another. If you want to change culture, persistance over a long period of time is going to be the key.
 
I have to say, I am impressed. Folks, I know this may sound alot compared to a flight attendants/ mechanics/etc...salary, but it is not. This guy could go make serious money somewhere else, but he is willing to stick it out for the sake of the comapny. Maybe trickle down culture adjustment will evedntually work. I sure as hell hope so.
 
I've said it before, and here it is one more time. With his education, training, and age - I'm surprised Arpey didn't walk away from this aviation mess - just jump ship with the rest of them. The fact that he didn't, and still hasn't proves my point. . . Carty may be gone, but there is still an idiot at the helm.

Anyone who turns down the multitude of available alternatives and sticks it out with a near sinking ship for a fraction of the compensation they could command elsewhere . . . has ulterior motives. Of course, win loose or draw, he does still have a few mil sitting in the bankruptcy proof golden parachute account so what the hell.

Nice article. I like thick frosting on my cake.


Confidential to Imagolfer: KMA! <_<
 
Sometimes you have to lead by example. I also think that to make the outrageous sums as some CEO's do, not the aviation guys/girls, but some of these other companies are absolutely sickening. Who is risking more? The one at the bottom or top? If I made a million a year for a coulpe of years, I wouldn't worry to much about losing my job. If I only make $25,000 a year, I am extremely worried. Just my thoughts......
 
coolflyingfool said:
If I made a million a year for a coulpe of years, I wouldn't worry to much about losing my job. If I only make $25,000 a year, I am extremely worried. Just my thoughts......
Well said. Just remember, the more you make, the more the IRS will take.
 
Mr.Arpey appears to be attempting to do the right thing although he was one of the 42 execs who was going to receive the golden parachute if AA filed Chapter 11.As the former COO he had to know about the secret plan that was made known in the SEC filing that caused Carty to step down. Too bad most of the other mid managers at AA are not following his example as they are hiding an excess of supervisors instead of laying them off.I believe that too many of his managers under him are underminding his effort to establish creditability with the employee groups.

Robert Crandall communicated with his employees by the monthly video UpdAAtes and annual Presidents Conferences.He would look you in the eye and tell you what he was going to do with the Company whether you liked it or not.

For the sake and legacy of AA I hope that Mr.Arpey is sucessful at the restructuring of AA. I had a job and life before AA and if he fails then I can do some other endeavours.
 
Schnurman's column is OK as far as it goes, but Arpey is not yet "Leading by Example". Or perhaps, he is leading by example in two different directions.

As mentioned by others, he and the other 40-some have a bankruptcy-proof retirement slush fund. So, we all have more on the line than he does. This is not unlike Marie Antoinette's "Well, let them eat cake, then". Except, I believe she was truly ignorant about the depth of the peasants' despair. Arpey knows what he is doing. Rather like the captain of the Titanic having the only lifeboat for himself and his senior officers. In fact, lower paying passengers were kept away from the lifeboats with guns by the ship's officers. Are we the lower paying passengers?

"Shared Sacrifice", indeed!

Many of us would be much less cynical (and even more positive toward the company) if the SERP were dissolved.

I do not believe that Schnurman was unaware of the SERP when he wrote his little puff piece. It would diminish the laudatory tone of the article considerably. I believe he (or his masters) chose NOT to mention it............ Any guesses why?
 
Wing- You couldn't be more wrong about Arpey. Did the thought ever accure to that maybe he loves the industry and wants to see the one company he has worked for his entire career succeed. There are people management and union that work at AA for less money than they could get else where because they want to work for an airline. In my mind, Arpey is one of those people.
 
Oneflyer said:
Wing- You couldn't be more wrong about Arpey. Did the thought ever accure to that maybe he loves the industry and wants to see the one company he has worked for his entire career succeed.
You mean I could be more wrong? Is this the same Arpey that was in on the "hide the pension" fiasco, then stepped up to the plate as #1 and all the employees embraced him like he had no clue what Carty was up to? That Arpey?

I don't think it has much to do with seeing the airline succeed for any other reason than none of us knows what his paperwork says he'll get if it does.

Otherwise, I see no reason for the guy not to take his skills and hit the road for a better deal. Airline CEOs just aren't the corporate elite anymore, not that they ever were, but there has to be some golden juice waiting for him somewhere at AMR for him to hang around for chicken feed.

I'd like to see his contract, then I'd know if he's sincere about the company, or something else but I recognize a 25 dollar slap in the face when I see it, so I don't think anyone at corporate is sincere about labor.

There is nothing left to do at this point but to sit back and see where it all goes.
 
Arpey turns down the raise for moving up to CEO and you think he's a sucker for not finding another job somewhere else for more $$$.

If he took the money you'd call him a greedy executive / Carty clone that's out to rob labor of everything they have.

You'd prolly have something to whine about if he worked for $1.

$25 slap in the face? The way I see it, none of us should get a dime for finishing sixth.
 
mjk said:
Arpey turns down the raise for moving up to CEO and you think he's a sucker for not finding another job somewhere else for more $$$.

If he took the money you'd call him a greedy executive / Carty clone that's out to rob labor of everything they have.

You'd prolly have something to whine about if he worked for $1.

$25 slap in the face? The way I see it, none of us should get a dime for finishing sixth.
Yeah,all AA employee labor groups should work for free so that AA management and the shareholders can have more money. Ha! Ha!

This is the most foolish ststement I've heard on this issue!