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 schnurman@star-telegram.com
--------------------------------------------------------------------------------
© 2004 Star Telegram and wire service sources. All Rights Reserved.
http://www.dfw.com
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 schnurman@star-telegram.com
--------------------------------------------------------------------------------
© 2004 Star Telegram and wire service sources. All Rights Reserved.
http://www.dfw.com