Pit

Well, you're certainly entitled to your opinion. At any rate, it seems like your angst is misdirected. Your beef is really with the board that agreed to this deal. You can't fault Arpey & Co. for making a good deal (at least I don't). Remember, these guys have to fend for themselves. They don't have a union looking out for them.

venk

If Arpey & Co., made a good deal for themselves at the expense of the company and that it is all that matters, then it shouldn't just be the FAs wearing the resign buttons.

skylady

Just to point out, the raised prices, baggage fees and cutbacks in amenities help add to the great decision making of the top "talent". Oh, I just love to use that word!

stbeeman

I did - prior to forming an opinion. So let's just review my logic and see if it makes sense. Note that this is just pulled out of news coverage, but there has been a lot of it since 2003.

1. In 2003, with AA hovering on the brink of bankruptcy, AA executives agree to a new compensation strategy that ties executive bonus compensation to increases in stock price. The AMR board, who has the power to approve the new compensation plan does so.

2. In 2003, the APFA and its members agreed to a new labor deal that included pretty significant concessions in wages and benefits. AMR and its executives (the people with the power to approve the new "compensation plan") did so.

Looks to me like AA's executives negotiated a better deal, and since the stock is far stronger than it was in 2003, they seem to have done a good job of accomplishing what they were tasked to do. If the FA/Executive positions were reversed, would you be railing against them?

As to your point about reading AMR SEC filings, etc. - I quit doing that when I divested myself of stocks in the airline sector. It was pretty clear a long time ago that wasn't going to be the kind of investment I was interested in holding anymore.

skylady

The stock is $5.43............how much stronger is it today then it was in '03?

Mark_T

More than double the price in early '03.

3Cforme

The executive payouts for 2008 will be accordingly smaller - or non-existant. It doesn't change the ill-logic of unionized employees wanting to change executive compensation agreements mid-stream.

KD5MDK

Unions have occasionally been willing to commit suicide before, it seems. UA probably has worse labor relations but CO certainly seems to have better ones. What's the risk premium that you'll have a strike at some point?

Pit

Note: All employees, even the FAs, work at the expense of the company. Still don't understand why you're railing at the execs, instead of the board?

venk

Not necessarily. Remember that it is relative performance to other airlines. So as long as they aren't at the bottom of the pool in performance, they will make a bonus and if they stink less than others, a rather hefty bonus regardless of whether the airline is swimming or sinking. That is the ill-logic.

I don't see any employees proposing changing executive compensation nor is it in their power to do so. They are observing that the executive compensation is perversely designed and want their own compensation changed (upwards) or alternatively to get different management (there is no ill-logic there, if they have lost confidence in the management skills). Of course, the company cannot afford the latter but then the management got themselves into this situation by giving themselves a compensation structure that set up false expectations in everyone. If the management had been compensated handsomely for getting the company into a state that would have benefited shareholders and employees, then there would be no buttons.

The ill-logic is paying management obscene amount of "incentive pay" (relative to the state of the airline) for not stinking as badly as other airlines. The ill-logic is benchmarking their pay levels to companies in other industries but not benchmarking the criterion for incentive compensation to such other companies.

On the other hand, it is not ill-logic as far as the management is concerned. Just incompetent greed.

venk

Then you should have known that the compensation plan details was public not conjecture or inside information.
The problem started right there in the structure of the compensation plan. Note that the executive via the company pays the consultants that have a vested interest in benchmarking to "justify" high salaries and stupid metrics and the board has a vested interest in rubber stamping what the management wants as long as there isn't an obvious breach of fiduciary duty, they don't run the company and have to give the management the benefit of the doubt in operational details. That is the reality of it and what leads to the current situation.

As you observed, the employees are not part of this negotiation nor is it their business to decide what the compensation plan is.

In all these negotiations, there has to be some amount of good faith on either side in coming to a mutual agreement. There was nothing wrong with the incentive structure of the employees and there is nothing wrong with it now because it is a profit-sharing plan and requires profits to get incentive pay. They did agree to the significant concessions based on some level of good faith on the management that when things start to get better, they would benefit from it.

Now, fast forward to 2007 when they saw the management be rewarded handsomely for a criterion that neither made the airline healthy nor result in any compensation upside to the employees (except a token amount that was more symbolic than anything else). Perversely enough, the rewards for the management (based on market performance) was primarily determined by the wage concessions that employees had made!

This was a wake up call for the employees because they no longer saw the management as being in the same boat as they are (i.e., it wasn't sink or swim together) in terms of goals, motivations, and incentives and more hard times were ahead. One could indeed be cynical and say that the employees should never have trusted the management to look after them. But any company that gets into this situation is already doomed (it has nothing to do with union structure, any employee pool that sees the management as untrustworthy is going to sink the company).

So it isn't a matter of negotiating a better deal because in the end it is the company that matters for shareholders and the employees (but for executives they couldn't care less because they are already set for life if AA were to die tomorrow, it is only a matter of ego and how much more they can get now). This is a problem with a lot of companies not just AA, but AA is a great example of it.

The management has not done a good job because the company is not considered healthy as for example CO or WN. They just haven't stunk as badly as some. Stock market price is not a good indicator of company health and a very poor one for incentive pay because as it happened, their 2007 payout was tied to a short-term bubble in the stock price. Now that the stock price is 1/4 of what it was then, you either have to say the management has done very poorly in the last year and should not receive another huge payout or you have to say the criterion sucks. Neither is going to happen because unless AA sucks worse than EVERY other airline, they will get a significant payout (not that this is in addition to a decent fixed pay they already get for doing their job) for "performance".

AA is a text book case of "incentive for incompetence" compensation structure.

McFlyPHL

Yes.. that's it. Incompetent Greed. No, it's called variable pay. Folks like to shout out about what a "good year" payout was for execs. Let's look at the Apr-May08 payout instead.

Arpey got ~485,000 shares - more than double any other indvidual (of the five who show as paid out). Now, these shares have a cash cost of zero. (Yes, there is a paper cost for accounting purposes.) Why is this important?

Those shares were worth ~$8.25 each when granted. That means the "expense" recorded was ~$4m. Added to his base pay of 655k, his total "cost" is $4.6m.

Now, fast forward to today - Those same shares at $5.50 are worth $2.67m.
In other words, the line of "executive greed" doesn't hold much water. Even in "bad times" you'd be hard pressed to find ANYONE who's willing (and, more importantly, able) to run a company with $23b in revenue for just north of $3m/yr.

... and before you rail on how AAwful this management team is, take a look at the total return to shareholders during Arpey's tenure. You'll find it's fairly good - IIRC, 85%.

So, before you go railing on "greed" - take a look at what happens when you examine the situation over a longer time horizon rather than as a soundbite for supporting labor and/or bashing management. Neither side is perfect, but the "class warfare" is just a bit ridiculous.

venk

Because the Board only has fiduciary responsibilities and oversight of the company in that regard, they don't interfere and affect the operational aspects of the company, in other words, they don't run the company. The management does. The problems with this company is with the incompetent management that has failed the company again and again while at the same time rewarding themselves handsomely.

Shareholders have not benefited by a healthy company, customers of the airlines are going to see increasing erosion of benefits (for which they can no longer continue to blame unions), opportunities have been missed to market the company to grow the topline growth as opposed to manage bottomline by cutting costs. None of these are board issues.

So there is no railing, just pointing out the incompetence and the reason why the employee pool is going into this extraordinary show of lack of trust and faith in management.

At some point, the board will have to realize this and make a change in management which is the only option they have but that is not an easy process and things will have to get a lot worse and they have a public spotlight on them before boards meddle.

In a way you can see the protests from the employees as increasing that spotlight which is really the biggest problem for the management.

The pins and buttons are a PR battle for that spotlight.

McFlyPHL

So they're, by your own admission, top 3 performers in their industry.

No, it isn't. The depression in stock prices is also related to a bubble - the oil price/commodity bubble. So, since we shouldn't - by your standard - base pay off of bubbles, how would you propose that it works?

As an analogy, picture a fleet of fishing boats (airlines) and a nasty, nasty storm (oil prices). Every boat in the fleet is going to be damaged. Are you willing to pay more for a crew that will bring your boat home with the least amount of damage? I sure would be.

Consider that analogy related to the last "storm" - 9/11. Would you pay the management more to preserve the pension rather than terminate it? Or how about the moves of aggressively paying down debt in good times so that the company would be stronger in the bad times? Perhaps you forget that.

venk

Ummm... they are not mutually exclusive. A badly designed variable pay that rewards incompetence is incompetent greed.
Sure it does. You don't pay some one $2.67M for poor performance based on a criterion that has no long-term positive effect on the health of the company. That is the whole point. The reduction in stock price has shown how poor the criterion really was.
You work for the AA compensation committee? Actually this was a major flaw in the benchmarking of the compensation. The airline business is a high cash flow, low margin business. The revenues don't always indicate the complexity of the businesses. The companies they benchmarked against have much more complex structures with multiple lines of business, etc., to be managed and also have a significant revenue that AA cannot get to even in good times. This is why the executive compensation structure of US companies is in such a mess. There is no logic anymore, it is what the executives can get away with the board.

If they benchmarked for level of pay with company X, they should have used the criterion of company X to reward that variable pay.

Have you considered stock dilution with new floats or just going by stock price differences? And what is it for the companies that they benchmarked against?

That I completely agree with. The union bashing here had to be balanced by somebody.

The reality is that there is a "class warfare" and the responsibility (despite the reason) for that is eventually with the management because it is their job to manage workforce relations and morale. That is partly why they are paid the big bucks.