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Entries in Executive Compensation (2)

Wednesday
Feb112009

A Look at US Airline CEO Compensation Through a Different Lens

'Tis the season when we will begin buying tickets to the Fourth Annual US Airline Executive Compensation Kabuki Dance. The airline dance follows the US CEO Kabuki Ball that has been playing out on Wall Street since the T.A.R.P. monies began to fill the coffers at many investment banks. Then we learned that some $18 billion of those taxpayer monies were used to pay executive bonuses in a year where the US banks clearly underperformed. Yes the Wall Street number starts with B.

Ever wonder whether: if the bankers had worked half time would they have lost only half as much? And based on losing half as much, they probably would have made more than the $18 billion.  But I digress . .

Last week, Andrew Compart writing on Aviation Week’s blog, Things With Wings, posted a piece entitled Executive Pay And U.S. Airlines.  After reading Mr. Compart’s piece, I was left wanting more – a deeper look at airline CEO compensation. 

According to the Institute for Policy Studies and United for a Fair Economy, the ratio between the average compensation of U.S. CEOs and the average income of U.S. workers was 344-to-1 in 2007. How, then, does CEO pay in the US airline industry compare to compensation for airline employees? 

In Mr. Compart’s analysis of executive pay at the 10 major US airlines operating independently at year-end 2007, he includes among executives’ salaries, bonuses, stock awards, stock options, payments to savings plans, and other income and rewards reported in federal filings. As Mr. Compart points out, a CEO’s salary typically accounts for only 20 percent of his or her total compensation.

I turned to MIT’s Airline Data Project to explore a bigger picture, looking at average salary and benefit packages for each the employee and pilot workgroups at the same 10 airlines.  Then I did a simple ratio analysis by company.  One technical note: per diem pay should have been included for any employee groups that receive it; however the way this date is reported makes it impossible to do an exact accounting.  Therefore, per diem expense is excluded for employees and pilots and would have been included in other compensation for the CEO.

In 2007, CEO compensation ranged from a high of $10.3 million at United to a low of $800,000 at jetBlue.  At $10.3 million Glenn Tilton’s pay is 142 times that of the average worker at United.  The 142 multiple is 41 percent of the average multiple of 344 experienced across all US industry in 2007.  The simple average for the 10 airline grouping was 63 times the average airline worker, or 18 percent of US multiple of 344.

The employees at Southwest and American have the highest average employee compensation among the airlines studied, with ratios at 14 and 57 respectively.  Of the six legacy carriers operating in 2007, Delta had the lowest ratio of CEO compensation at 52 – a year when Gerry Grinstein passed the gavel to Richard Anderson.  Among the LCCs, AirTran had the highest ratio at 53 times.  It is interesting to note that in 1980, the multiple of CEO compensation to average worker compensation was 40. 

Among pilot groups, United’s CEO compensation was 68 times that of the average United pilot’s compensation.  The average for the 10 airline group was 29 times.  jetBlue had the lowest at 6 times, a year when Dave Barger replaced founder David Neeleman as CEO.  Among the legacy carriers, American had the lowest ratio of CEO compensation to average pilot compensation at 23 times.

Concluding Thoughts

The relationship of executive compensation to worker compensation has been a measure used for decades by those on both sides of the “is it fair?” debate.  I am not trying to answer that question. What is relevant is the perspective and context as it pertains to the US airline industry.  It is right that airline executives have a large performance component of their compensation.

CEO and executive compensation is volatile in part because the money a proxy officer pockets is risk-based and therefore highly dependent on market conditions.  Most employee compensation, by contrast, is guaranteed and has very little risk so the denominator (employee pay) does not deviate to the extent that the numerator (executive pay) does.

If nothing else, this simple analysis underscores what I’ve long preached: on balance, jobs in the airline industry pay quite well as they relate to jobs that require similar training and experience across the employment spectrum.  And too often, that fact gets lost in the debate.  

 

Friday
Oct262007

Just Put It On Ice: American’s Ability to Pay ≠ APA’s Expectations

As I read this morning’s Wall Street Journal, the headline on page 2 is “Economy’s Weak Signals Persist” and the headline on page 3 is “Oil Tops $90 on Range of Worries.” What this means for the airline industry is well documented in Planebuzz click here.

We said the eyes would be on Texas airline labor negotiations, and we got a good glimpse of that this week. The Allied Pilots Association presented its Section 6 opener to American Airlines on Tuesday. This writer’s take on what American is seeking is a cost-neutral contract (which in effect preserves APA’s industry leading position) where productivity gains could cross subsidize increases in other sections of the agreement. By contrast, APA asked for pay increases in the 50% percent range.

This is one rich deal. Add the productivity gains and the multiplier effect of wage increases on pension and benefit costs (and well before any opportunity costs or opportunities lost are analyzed), my back of the envelope calculation suggests the price tag on this proposal is comfortably a three comma number. Yes, the number starts with a B and not an M. And this is before negotiations start with the other unions representing the vast majority of AA employees.

Let’s put this in perspective: Today, American has a pilot cost per block hour disadvantage versus every single one of its major competitors in the US market click here. If American had a pilot contract along the lines of the Continental agreement, that is at or above the industry in terms of compensation and productivity, American would need to reduce its annual total pilot costs by as much as $500 million click here. But American is not seeking concessions; it is seeking a competitive contract recognizing the “gives” by labor outside of bankruptcy.

I argue that the APA proposal fails to serve its members. Not just because of the costly demands, including the proposal that pilots receive holiday pay if they fly Super Bowl Sunday, but because the union’s demands insist upon a return to 1992 wages adjusted for inflation. That sets completely unrealistic expectations when put in context of the massive change in the landscape for network carriers, and the US airline industry for that matter, since the mid-1990s. American’s average “nominal” domestic fares were actually lower in 2006 than they were in 1995 click here.

In the media coverage, the APA suggested that its opening proposal would lead to a quick settlement. I beg to differ.

When two sides are so far apart on an agreement that there is no basis for movement, it is said that negotiations are “put on ice.” For many reasons, this round of labor negotiations is the most important since deregulation. For the major airlines to have any hope of succeeding for the long term, this upcoming round of contract talks must produce agreements that are durable and sustainable and make strides toward eliminating the cyclicality that has plagued discussions between labor and management for the deregulation generation.

There remains a real opportunity for these negotiations to be “industry interesting” in a good way and think about ways for employees to share in any upside while still realizing some protection in the downturns. That’s what the unions should be aiming for in getting their members a deal.

But if, in the APA’s view, the upside means in a 50+% increase in base rates then there really is no starting point. Openers are supposed to be starting points, not the point of no return.

Executive Compensation

We cannot discuss industry economics and labor without also discussing executive compensation. For as long as I have been in this industry, airlines have been run for pilots, by pilots and in fear of what pilots might or might not do. As a former flight attendant – that is how I put myself through school - I constantly questioned it and still do. For virtually any carrier, in a list of the top 100, 200 or 500 most highly-compensated employees, the majority would be pilots.

This industry has never had a deep bench of management talent . . . in part because airline executive contracts have historically not been as rich as executive contracts in other industries. The executive management team in the airline industry is usually there because they have jet fuel running through their veins, not because the financial upside is so great.

Many say that there is no justification for the executive payouts in recent years across industry – not just the airline industry, but throughout corporate America. But the simple fact is that markets are at work. Not all markets are rational, but given that markets by definition operate on perfect information, ultimately they return to the trend line.

For CEO’s, CFO’s and CIO’s the market rates are set in New York, Des Moines, Singapore, London and Los Angeles as companies in the US and around the globe are seeking the same talent to do the job for them just as American seeks to find the best people to fill these positions as well.

The reality is, however, that a new market rate has been set for pilots and it is not 1992 times inflation to the sixteenth. It is $120,000 and not $180,000 click here.

For awhile, “pattern bargaining” fueled an unrealistic – and unsustainable – growth in average pilot wages. It began with Delta’s lucrative pilot contract in 1999, followed by United’s topper in 2000 as it followed the "Delta Dot" along the road to bankruptcy.

Now there’s a new pattern, and a new market reality, and that is the contracts reached in bankruptcy and ratified at United and US Airways in 2002 and 2003. That’s how the market works, and airlines – like companies in any other competitive industry – generally compensate management and employees at the going market rate and as necessary to retain its best people – period.

Don’t assume that I support executive compensation packages that have benefited senior leaders while workers have seen their lives negatively impacted. I do not. But, I am a believer in markets. The convergence of what is paid to pilots, flight attendants, ramp workers has found an equilibrium and that is what markets with perfect information do. Will the market rethink executive compensation as well? I think so.

So......

We can spend a lot of time thinking about the APA proposal or just recognize that negotiations in this round will take some time. During restructuring, the market realities dictated quick negotiations and resolution. This time it is different. Neither labor nor management has significant leverage. Labor is trying to create leverage using the executive compensation issue because there is little else that resonates as well with a broad base of employees and the public. Meanwhile, management teams are doing their job and actually posting profits at a time when pricing power continues to decline - with no adjustments for inflation. The only structural change now permitting increases in revenue is in reduced capacity and in the lofty levels where oil is trading and, finally, an industry willing to pass on a portion of those increases to the consumer.

There are many who say the industry’s recent profitability comes on the backs of labor. That argument ignores the fact that the recovery is the result of tactical and strategic decisions, combined with other management actions, to achieve profits in an environment that has been structurally changed.

Keep in mind: $4-5 billion in profits in an industry earning $130 billion in revenue does not signal a healthy recovery.

I’ve titled this post “On Ice” for more than one reason.

The first page I read in the newspaper is the sports page. In an interview in the October 25 USA Today, Paul Kelly, the new Executive Director of the National Hockey League’s Players Association had some profound thoughts to share click here.

1. "Do we need to understand where we should cooperate and where we should draw the line? Absolutely," Kelly said. "But anyone who thinks I'm going to fire the first shot across the bow of the NHL, they've got it all wrong."
2. "My view of the world is that unless you have a personal relationship, a real human relationship with someone, it's difficult to transact real difficult business," Kelly said. "I want to get to know Gary, and I want him to get to know me. And I understand that there is a line there — that we represent different interests."

Perhaps hockey and airlines have little in common. But negotiations are negotiations, and they are not done on an island.

At American, as well as across the industry, pilot negotiations are going to result in "transacting difficult business". Captain Hill, reach out to Gerard Arpey and begin a real negotiating process. Mr. Arpey, reach for Captain Hill and reiterate the commitment you have made, and kept, to maintain pension benefits and retaining the components of the pilot’s agreement that ensure that AA employees will have dignity in retirement and in their day to day living to the best of your ability to pay – something that cannot be said of all carriers in this industry. Otherwise it could be a long, cold winter in Ft. Worth.