The pay for top executives in the US airline industry has become a matter of considerable national interest.
AMR Corp's chief executive, Don Carty, slashed his pay package to zero for the rest of the year following the terrorist attacks on the World Trade Center and the Pentagon. His company owns American Airlines. Executives at Continental Airlines Inc, Delta Air Lines Inc, US Airways Group Inc and UAL Corp, the parent of United Air Lines, followed Carty's example.
Executive pay also was an issue when Congress agreed to provide the industry with US$15 billion in aid. As a condition of the bailout, any airline executive that earned more than US$300,000 last year won't be able to receive more than his 2000 pay in any 12 consecutive months through Sept. 11, 2003.
To shed some light on what airline CEOs have been earning, I looked at 19 carriers, all of whom had revenue of US$100 million or more during fiscal 2000.
Total pay for the 19 CEOs averaged US$3.1 million. It ranged from the US$175,000 earned by Douglas Voss of Great Lakes Aviation Ltd, which operates as United Express, to the US$12.1 million that Rakesh Gangwal of US Airways Group Inc hauled away. The results are based on data from ecomp-online.com, a Web site devoted to executive compensation.
Judging by the results of my industry studies earlier this year, airlines are relatively modest payers. Companies with high levels of revenue, say US$20 billion, pay almost the same amount to CEOs as power utilities and consumer-products companies, which in turn pay much less than pharmaceutical and computer companies.
At lower revenue levels, closer to US$100 million, airlines pay as much as 30 percent more than utilities, but less than half that earned by consumer products CEOs and just a fifth that earned by computer CEOs.
Differences in revenue can explain 63 percent of the variation in total pay among the airlines' CEOs, according to statistical analysis. As with every other pay study I have ever conducted, the bigger the company, the more the CEO earns.
Another trend from past studies also proved true: Company performance, as measured by the difference between shareholder returns and the return on the Standard & Poor's 500 index for fiscal 2000, didn't explain any of the pay variation.
For proof, simply compare the pay and performance of Kerry Skeen of Atlantic Coast Airlines Holdings Inc and Herb Kelleher of Southwest Airlines Co. The case for money being motivational is hardly persuasive when you look at these two CEOs.
Skeen performed at the 94th percentile -- that is to say, better than all but 6 percent of the companies studied -- and was the group's most relatively overpaid CEO. Atlantic Coast delivered a 72.1 percent return last year as the S&P 500 returned a negative 9.1 percent. His US$2.6 million pay package put him 194 percent above the market for a CEO running a company of similar size.
Kelleher, who performed at the 100th percentile, was the most relatively underpaid CEO. His company's stock had a 108.1 percent return during 2000. Yet he earned only US$890,000, a level of pay positioning him 78 percent under the market for a company of Southwest's size.
Airlines that historically have paid a lot to their CEOs continued to do so last year, even though the stock performance may not have been all that good. And airlines that historically have paid little continued to do that as well, even if the performance was excellent.
Consider US Airways' Gangwal, whose pay was 121 percent more than the average for a company of the same size. Gangwal succeeded Stephen Wolf, who received some fairly awesome packages as CEO of UAL Corp, United Air Lines' parent, and also at US Airways.
On the other side is Southwest's Kelleher. He usually rates at the top of any airline analyst's list of the best CEOs in the industry. Yet he has always insisted on a Rhode Island-sized pay package, even though he is a proud, if not native, Texan.
Gangwal and Wolf are among the executives who agreed to forego their pay for the rest of this year. At Continental Air, CEO Gordon Bethune and President Larry Kellner also gave up their compensation. So did Delta CEO Leo Mullin. Mesa Air Group Inc's CEO, Jonathan Ornstein, and its president, Mike Lotz, cut their salaries by 50 percent.
AMR's Carty, the first CEO to give up pay, followed a tradition started by his predecessor, Bob Crandall. For years, Crandall refused to take raises in salary or a bonus because, as he wrote me once, he was trying to get his pilots to pull in their collective pay gut and figured he could only do that if he pulled in his own gut first.
Carty has asked employees to take pay cuts to help save the company, and 13 senior executives and 40 vice presidents have taken the pledge to do so.
Congress, in crafting the bailout legislation, seemed resigned to the idea that top executives' pay always goes up, and never down. How else to explain why lawmakers didn't mandate cuts for executives, instead of freezes, at a time when employees are being led to the layoff guillotines in tumbril-sized lots?
One thing that worries me greatly about the legislation is its absence of precision. The pay freeze covers salaries, bonuses and "stock awards." Does the latter term mean only free shares of stock, or does it cover stock option grants, too? It is highly common these days for a CEO running a troubled company to reduce his bonus, perhaps to zero, and to more than make up for the cut by arranging outsized grants of options -- given, of course, at a time when the stock price is ultra-low.
Then again, I take some comfort from the fact that the pay freeze also covers "other financial benefits." Any reasonable person would take that to include stock option grants. At least that's the way I hope the airline chiefs see it, especially in light of those pay cuts.
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