By Mitchell Schnurman
mschnurman@star-telegram.com
Every April, union leaders at American Airlines threw a fit when the company handed out big stock awards to management. In bankruptcy, they'll have a lot more to howl about.
American's top executives are likely to be paid millions more than the former CEO and his team, no matter how much the unions protest.
And the issue could become even more controversial, because much of the execs' reward will hinge on slashing big-ticket costs like pensions and benefits.
The more that employees and creditors give, the more that management stands to get.
That's the history of airlines in bankruptcy, and it's how most of the corporate world operates. Unions can complain to the judge -- and often do in these cases -- but if bondholders, lenders and other creditors accept the pay plan, it's usually approved.
Executive pay at American doesn't have much room to go down. Despite the griping about bonuses, former CEO Gerard Arpey was paid more like a utility infielder than a big-time chairman. That's because three-fourths of his realized pay was in stock, and he kept the vast majority of shares as the price plunged.
By my calculations, Arpey made about $15 million in the past nine years. That's $1.7 million annually, roughly one-sixth the going rate for a
Fortune 500 CEO.
That's an easy bar to beat for successor Tom Horton. In bankruptcy, execs are typically rewarded with salaries and cash bonuses that are not extraordinary, but they get big stock awards when their company emerges from Chapter 11.
Reports on the value of the past pay packages don't always sync up, because they include projections of future stock prices. As with American, stock awards don't always deliver as advertised, either. Companies generally emerge from bankruptcy with better prospects, which translates into a better showing on Wall Street, but nothing's guaranteed.
On paper at least, the bankrupt airlines paid better than American.
Glenn Tilton of United Airlines received $24 million in total compensation in 2006, according to a Bloomberg News estimate, and others put the value at nearly $40 million. Northwest's Doug Steenland got $26 million worth of shares. US Airways' Doug Parker got a $14 million package, according to news reports.One exception was Gerald Grinstein at Delta. Then age 74, he declined all incentive pay, and the next four Delta execs got $29 million in grants and perks. Richard Anderson, recruited to lead Delta in 2007, received an $11 million long-term incentive.
American hasn't proposed a new compensation plan yet, but the current one is obsolete. Seventy percent of executive pay at American is tied to the stock price, which traded at 69 cents Wednesday and is eventually headed toward zero. The company must devise another way to retain and recruit top managers, and reward performance.
Companies in Chapter 11 usually unveil pay plans within three months of the filing, and the proposals must go through the creditors committee for review. At United and Northwest, where union animosity ran high, executive pay became a flash point in the bankruptcy, generating lots of hearings and news coverage.
At United, the protests led to a smaller stock award for the management team, although it still totaled 8 percent of outstanding shares.
At American, union leaders often complained that they had no say on executive pay. Arpey famously told them that they didn't get to play in that sandbox, because it was the exclusive purview of the board of directors.
The great irony here is that the unions finally get to throw in their two cents, but execs will likely get more money eventually.
That's because American has been paying less than the median rate. Maybe it's more accurate to say that American execs were earning less because the company performed so poorly.
However it's viewed, the prospects for American and its execs are likely to improve after bankruptcy -- at least for those who keep their jobs.
Bankruptcy laws were overhauled in 2005, and Congress added measures to curb abuses in executive pay. But two years later, a committee met to address the payouts to leaders like Tilton and Steenland. The title of the hearing: "Executive compensation in Chapter 11 cases: How much is too much?"
Members of Congress explored whether pay was excessive and whether labor unions had a level playing field.
Richard Levin, a New York lawyer who helped write the bankruptcy code in 1978, testified that defining
excess was like asking, "How high is the sky?"
"It has to be case-specific," he said.
And while everybody makes sacrifices in bankruptcy, the process is aimed at balancing bargaining power. Unions and employees have a voice, but others have just as big a stake.
"It can never be completely equal," Levin said about influencing the outcome. "But you try to create some balance."
At American, it's a good bet that executive pay will tilt in another direction.
Mitchell Schnurman's column appears Sundays and Thursdays, 817-390-7821 Twitter: @mitchschnurman
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