This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx /-------------------- advertisement -----------------------\ Explore more of Starbucks at Starbucks.com. http://www.starbucks.com/default.asp?ci=1015 \----------------------------------------------------------/ American Air Pulls Back Bonus Plans for Executives April 19, 2003 By EDWARD WONG American Airlines dropped plans yesterday to pay large bonuses to seven top executives if they stayed with the company until January 2005. But the carrier said it would keep money in a much-criticized trust fund set up to protect the pensions of 45 executives in case it files for bankruptcy protection. Despite the attempt by American to appease its irate workers, the flight attendants' union said last night that it would vote again soon on $340 million in critical concessions its members narrowly agreed to give the company on Wednesday. American's announcement came after union leaders denounced Donald J. Carty, the chief executive, and other officials of the AMR Corporation, the parent of American, for agreeing to take the compensation packages while they were seeking annual labor concessions worth $1.8 billion and for not disclosing them during negotiations. American, the world's largest carrier, had told the unions that big concessions were needed to keep the airline from having to seek legal protection from its creditors. The conflict is only the latest in a series of increasingly hot flash points over executive pay at the airlines, an issue that management experts say could complicate efforts to revamp the industry. In the last month, several airlines with dismal returns to investors have disclosed in securities filings that they gave what many viewed as generous compensation packages to chief executives even as those executives were demanding concessions from unions and laying off workers. Concerning the most recent example, Representative James Oberstar, Democrat of Minnesota, sent a letter yesterday to Mr. Carty saying that "it is unfortunate that at least some of your executives have such limited loyalty to the company and its employees." On Tuesday, the Allied Pilots Association and the Transport Workers Union said their members had voted to give annual concessions of $660 million and $620 million each. The Association of Professional Flight Attendants initially voted by a narrow margin against $340 million in concessions, then accepted the cuts after voting was extended to Wednesday and members were allowed to change their votes. AMR disclosed the trust fund money and bonuses in a filing made with the Securities and Exchange Commission on Tuesday night. Workers became irate on Thursday, and union officials said they might not approve the concessions voted on by members, even if it meant pushing the airline into bankruptcy court. In a written statement yesterday, Mr. Carty apologized to union leaders for not telling them about the trust fund money and bonuses during negotiations. "We have all agreed to give up these retention payments in order to give our employees confidence in management's ongoing commitment to share sacrifice," Mr. Carty said. But Mr. Carty said the company intended to keep in place the payment made last October to a trust fund set up to protect executive pension benefits from creditors during bankruptcy proceedings. Mr. Carty argued that such a fund "is a common tool used in a broad range of industries," and that it "represents a benefit already earned, in some cases over a period of 17 years." American has not disclosed the amount it has paid into the fund. When American was negotiating with the pilots, it said the pilots could lose their pension benefits if the company filed for bankruptcy-court protection, union officials have said. In response to Mr. Carty's announcement yesterday about the bonuses, John Ward, president of the flight attendants' union, angrily said in a telephone message to workers: "No doubt this cancellation is only a result of the fact that they were caught with their hands in the cookie jar." He added that he had sent a letter to Mr. Carty saying the flight attendants would schedule another vote soon, though he did not give further details. The trust fund American has decided to keep is similar to one that Delta Air Lines set up in the name of its chief executive, Leo F. Mullin. American said its fund was more "responsible and conservative" because of the payments it makes, but workers at both companies are denouncing the very existence of these funds. Critics of executive pay say such funds undermine worker and investor trust because they create the appearance that executives are looking out for themselves. "The only word to describe that is `disgraceful,' " said Nell Minow, a founder of the Corporate Library, a research group that tracks executive compensation. "That's entirely the wrong signal. Again, it's all downside protection. There's no performance aspect to it." Airline executives are jeopardizing their ability to overhaul their companies during the industry's worst downturn by taking such compensation packages, management experts say. In recent days, employees have been using the word " Enron" when they talk about airline executives, invoking a symbol of corporate greed. This kind of hostility will stay in the collective memory of workers, experts say, and the airlines could find it increasingly difficult to make cultural and cost-cutting changes needed to revamp their businesses. "There has to be a perception that both parties are sacrificing for the greater good," said Paul Clark, professor of labor studies and industrial relations at Pennsylvania State University. "This is anything but a sacrifice. It sends all the wrong signals." The airlines generally defend their executive compensation packages by saying they need to offer enough incentives to keep these managers around during a time of crisis. They also say that some executives were given big raises last year because their companies did not perform as poorly as rivals, even though the return to shareholders was dismal. Continental Airlines and Delta both have compensation packages tied to relative industry performance. Gordon M. Bethune, the chief executive of Continental, had total compensation last year worth $14.7 million, a 172 percent increase over 2001, according to Pearl Meyer & Partners, an executive pay consulting company. In the period, the company reported a loss of $451 million, and investor return was a negative 72 percent. Ned Walker, a spokesman for Continental, said that part of Mr. Bethune's pay "is basically valueless in today's economic environment and has a long way to go before it gets into the money." But that statement refers primarily to Mr. Bethune's stock options. Excluding those, Mr. Bethune's compensation rose by 82 percent. Mr. Bethune, meanwhile, has said Continental will lay off 1,200 workers this spring as part of a plan to cut $500 million a year in costs. It is true that Continental is in a healthier position than some of its rivals, and one could argue that Mr. Bethune performed better last year than some peers in the industry. But compared with many companies in this country, Continental performed disastrously, if investor return is used as a benchmark. Critics say cases like this show that company boards need to begin relying more on measures of absolute performance rather than just gauges of relative performance when determining pay. "The board needs to exercise some judgment in assessing whether the payments are warranted from the shareholder perspective," said Pearl Meyer. Partly because of relative-performance criteria, Mr. Mullin at Delta received a compensation package worth $13.8 million last year, a 104 percent increase from 2001. Meanwhile, the airline reported a loss of $1.27 billion and investor return was a negative 58 percent. After drawing scathing criticism from Senator John McCain, Republican of Arizona, and Delta workers, Mr. Mullin said on April 3 that he would take a cut on his 2003 base salary, to $596,250 from $715,500. He added that he would forgo a potential bonus of $1 million and give up stock-based retention awards valued at $5.5 million. But he did not give up millions of dollars that Delta paid to the executive pension trust fund set up in his name, the same kind of fund under fire now at American. Other airline executives have said recently they will take cuts in their pay. Mr. Carty said last month that he would take a 33 percent cut off his annual base salary of $811,000 and forgo a cash bonus for a third consecutive year. Glenn F. Tilton, the chief executive of United Airlines, part of the UAL Corporation, said on April 4 that he would take a cut of 14 percent to his base salary of $828,500 this year. But pay experts regard cuts to base salaries as meaningless sacrifices, since those salaries make up such a small part of total compensation. In addition, the "retention" bonuses that Mr. Mullin and the seven top American executives said they would give up should never have been proposed in the first place, critics say. Companies argue that such payments are needed to keep executives from defecting. But the bonuses reward people just for showing up, not for how they perform, management experts say. In the airline industry, the other big argument against "retention" bonuses is: Why try to keep executives who are running companies that perform so poorly? And given the executives' track records, not too many other companies would be interested in luring away these executives anyway, said Morten Beyer, an industry consultant. "Where would they go?" he said. "Who needs them? These guys should be glad to have a job." http://www.nytimes.com/2003/04/19/business/19AIR.html?ex=1051765653&ei=1&en=5d44ddecae548502 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2003 The New York Times Company