Originally Posted by
cparekh
To answer your question, the $250 million was the value of the stock bonuses given to managers. This is a common incentive technique, as the value of the bonuses goes up when then company performs better. If the company tanks, the stock will tank, and then the bonuses are worth less.
This is not a cash bonus, and there is no cash involved. You could not just give a lower bonus and use the rest to keep the company "alive."
Incorrect at many levels. I hope you are not confusing stock grants with stock options. With stock options, they would have the option to buy stock at the current price (at time of award after vesting), and so if the stock price goes up, they would make money out of those options, if the stock price went down, they would be under water. This is the option that was offered to non-exec empoyees. The grantees take the market risk. To exercise the options, you still have to buy the stock at the stock price and so it has value only if the stock price has gone up since the award date.
When you get stock grants, you get stocks that can be sold on the open market (after any vesting period). You make money even if the stock price is $0.01. The payouts were calculated using a formula based on AA's stock market performance as a significant metric relative to other airlines not a more legitimate metric to measure company performance, so a temporary blip in stock markets (which may have nothing to do with airline's health) can and did lead to a large bonus payment that unlike stock options would continue to have some value regardless of the stock price.
This payment IS a liability for the airline in its balance sheet and is a liability at the price at which the stock grants were given NOT the current price. The airline will either have to issue more stock (diluting everyone else) or give them already issued stock that it has either not sold yet or has bought back from the open market. In all these cases, the airline could have raised cash instead by issuing/selling those stocks in the open market (even the stock options have an impact on the company's balance sheet but not cash-flow impact). I don't know what the vesting schedule was for the bonus grants but typically stock options have much stricter vesting schedules than stock grants.
Now that the stock price is diving down into $2 territory (current forecast by S&P analysts), the exec bonus is still worth something if they sell them (assuming they didn't cash out earlier) while people given stock options would have been so under water that the options wouldn't be worth the paper they were written on.
The AA executive compensation structure will be remembered as one of the worst designed compensation structure in US industry and a shining example of both executive compensation excess as well as an example of how wrong metrics for performance-pay can reward mediocrity to the detriment of the company's performance. But that is all of academic interest. The real-life fact is that the employees are finding it difficult to make ends meet and facing lay-offs with the downturn and the execs are worried whether they will be able to afford another boat or mansion next year regardless of what happens with the airline. The employees put their livelihood at risk and execs put their mansions and boats at risk for company performance.
There is a problem with this picture for the industry and you don't have to be a socialist/commie to see that this is not sustainable across economic cycles.