The latest sleazy executive-pay trick.

The latest sleazy executive-pay trick.

The latest sleazy executive-pay trick.

Moneybox
Commentary about business and finance.
April 29 2003 4:08 PM

Retaining Gall

Why are airlines paying "retention" bonuses to executives no one else would hire?

Every so often, corporate America gives us reason to think that, hey, maybe the Marxists were right about the villainy of capitalists after all. American Airlines has been treating us to a spectacular example in recent weeks. Even as it was using the threat of Chapter 11 to push employees into massive wage cuts, the airline was funneling $41 million into a special bankruptcy-resistant pension trust for 45 executives. And early in 2002, the struggling airline's top six executives were offered "cash retention" bonuses amounting to twice their base salary—just for staying on the job until January 2005. American then hid these sweet payouts until after the unions had voted to cut their own pay. When the news finally broke, it cost American CEO Donald Carty his job—but the executives still get to keep the juiced pension benefits.

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The only satisfying part of this turmoil—besides, of course, the cashiering of Carty—is that it shined a high-wattage bulb on the infectious practice of "retention" bonuses—the most recent in a long line of sleazy, undeserved compensation tricks at publicly held companies. Airlines seem particularly fond of the unnecessary executive bonus. Delta Airlines last year also set up special pension trusts for 33 senior executives (neglecting to disclose their existence until this spring) and offered cash retention bonuses to several executives just for showing up to work. Delta noted in its proxy filing that "the business environment presents ongoing risks and creates a significant concern for retention of management personnel."

This would be hilarious if it weren't costing Delta shareholders millions. Who exactly is clamoring to hire Delta or American's top managers? They're lucky to have kept their jobs at all.

A few years ago, boosting bonuses, wages, and benefits to retain managers made sense. In the hothouse economy of the late '90s, large, stodgy companies like airlines routinely lost executives at all ranks to Internet startups and technology companies. But it is ridiculous to use retention to justify massive payouts to unaccomplished executives who are working in a wilting industry, which is in turn bound up in a slack economy. (Especially since these are the very stolid company men who didn't even have the moxie to try something new during the boom.)

Since March 2001, many of the estimated 2.5 million jobs lost have been managerial ones. The most recent Bureau of Labor Statistics data shows the unemployment rate for management and professional occupations is at to 2.9 percent, compared with just 1.7 percent in 2000.

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Indeed, it turns out that high-paid workers are no more immune to the labor market than lower-paid workers. When economic times are tough, their wages tend to stagnate or even fall. Look what's happening to the salaries for software programmers, or Internet business development executives, or professional baseball players. Jonathan Mahler's April 13 piece in the New York Times Magazine nicelydetailed the travails of six-figure managerial types who were unable to find any job at all. Rather than paying special bonuses to retain executives, American and Delta could have hired back some of the executives who left three years ago at half what they're paying their current clowns.

An executive vice president at American should be feeling the same pressure and fear that American pilots and machinists do. Sure, the occasional senior manager with transferable skills can go elsewhere. Last June, Tom Horton, chief financial officer at AMR (American's parent company), left for AT&T. But generally speaking, there isn't much of a market for these executives' talent. With the bankruptcy of major airlines and the effects of war and SARS on global travel, the airline industry is in the process of shrinking 20 percent to 30 percent. Executives should be taking the same 25 percent pay cuts that they are forcing down the throats of their employees.

The most troubling aspect of the retention bonuses is psychological rather than financial. American's executives presume that unionized pilots, flight attendants, and baggage handlers will work with the same attention to detail and concern for security as they did when their wages and benefits were 25 percent higher. But the unspoken assumption of retention bonuses and benefits for top bosses is that senior managers simply can't be relied upon to work as hard if their salaries are cut, or if their options are underwater. Isn't it time we stopped applying the soft bigotry of low expectations to senior executives?