Executive Comp Issue Could Ground AMR Labor Deal

April 22, 2003 (PLANSPONSOR.com) - Compensation equity apparently has its own theory of "relativity," and it is extracting its toll on labor negotiations at American Airlines.

As the world’s largest airline teeters on the brink of bankruptcy, AMR Chairman Don Carty finds himself forced to deal with a public relations nightmare following disclosure of two executive compensation programs.  

“You know, the world’s largest airline doesn’t do things halfway. When we do something, we do it bigger and better than anyone else,” Carty said in a statement. “We did what has never before been done … we delivered the largest consensual savings in US history. And then I made a mistake and, of course, it was a big one.”

Relativity in this case seems to be that, while AMR considered its executive compensation arrangements to be relatively modest by industry standards for comparable positions, the millions of dollars involved dwarfed the salaries and pensions of airline workers who were being asked to swallow layoffs and pay cuts.

Retention “Pull”

Union leaders had reacted strongly to news of the special bonuses and pension plan following an AMR filing with the Securities and Exchange Commission (SEC) (see  American Airlines Moves to Protect Executive Retirement Funds ).   The company said it briefed union leaders about all executive comp programs prior to a vote on a new labor pact, but union leaders were apparently shocked by the disclosure, leading some to say that the failure to disclose the existence of the fund in bargaining by American constituted a material breach of its obligations to provide relevant information in the negotiations.   Last Friday Carty said AMR executives would give up the retention bonuses, which would have paid six top executives twice their base salaries, and a seventh a bonus of 1.5 times his base, but would keep a supplemental executive retirement plan (SERP) established in 1985 (see  AMR Execs Let Go of Retention Program ).

Asked at a news conference Monday why he didn’t disclose the executive benefits sooner, Carty said he believed American’s benefits would appear modest compared with those granted at other carriers. “I naively believed that we were going to look very good by comparison,” he said.

Bad Timing?

The timing of AMR’s annual report to the Securities and Exchange Commission (SEC) didn’t help matters any.   Originally due March 31, the same day set as a deadline for either getting tentative agreements with union leaders or filing for bankruptcy-court protection under Chapter 11, AMR asked for a 15-day extension because it was “in the process of negotiating and implementing a crucial cost-reduction program,” including negotiations with employees and creditors.   As a result, AMR’s SEC filing and the end of worker voting on contract concessions coincided on April 15.

Carty and top American officials made a conscious decision to delay making public the executive perks, especially after a controversial disclosure of a similar program by at Delta Airlines (see  US Airways President Says Peers Make Too Much ), according to a report in the Wall Street Journal.   Some inside the company urged Carty and other top executives to make the perks public according to the WSJ, citing people familiar with the situation. The report claims that Carty worried that if the benefits were detailed, critics would have more ammunition and American’s three unions would reject $1.8 billion a year in concessions, forcing the airline into bankruptcy.   Fearing that Chapter 11 filing would be worse for workers than the voluntary concessions, Carty chose to keep mum on the subject, according to the report.

However, since the revelations, both the Transport Workers Union, which represents ground workers and mechanics, and the Association of Professional Flight Attendants say they intend to hold another vote.   AMR continues to maintain that it believes the labor concessions in hand constitute valid agreements.  

Departure Time

In AMR's defense, it has had trouble hanging on to executives.   Three of the top eight officials listed in the 2001 proxy statement have retired, and a fourth, Chief Financial Officer Tom Horton, left for AT&T Corp., according to the WSJ.   Meanwhile, a number of vice presidents deemed crucial to the operation of the airline were at retirement age and considering leaving, according to the report.   Under the SERP, which was created in 1985, they would have received lump-sum payments and, because the plan was never funded, American simply paid out lump sums as executives retired.   Those benefits would have been wiped out had the airline gone into bankruptcy.   And because the pension trust wasn't funded until October, American didn't have to disclose it until the company reported its year-end results.

Yesterday Carty described a "mass outflow" of executives who were approaching retirement age after the September 11 attacks.   "We had retirement-eligible top officers who feared being wiped out before they could retire," he said, according to the Fort Worth Star-Telegram.

More than a week before the 10-K filing, American was asked by The Wall Street Journal whether it had created executive compensation plans similar to those of Delta. Company officials said, "No."   However, that inquiry reportedly set in motion a debate inside American over whether to disclose the benefits before voting ended, or risk angering employees after the deals were done.   The WSJ said Carty firmly believed that American's executive pension trust was different from Delta's because it isn't as generous, and thus wouldn't provoke as much contention, citing several people. Delta's plan pays additional benefits to cover tax payments, for one thing.  

Carty now promises "no more surprises" when American's proxy statement -- a document that outlines compensation for top executives and directors -- is filed with the Securities and Exchange Commission in the near future.   Carty said union and non-represented employees "stepped up" by ratifying concessions and keeping the company out of bankruptcy - "And then I stumbled," he told reporters at the company's Fort Worth headquarters Monday.

Now the question is whether that stumble will send the airline over the edge.