American defends exec pay
Despite outcry from unions that gave up pay, airline calls exec bonuses and pensions "responsible."
April 18, 2003: 11:26 AM EDT
NEW YORK (CNN/Money) - American Airlines admitted Friday that its unions had not been briefed about controversial pension and retention bonuses for its top executives before membership voted on concession contracts, but said the airline stood behind its plans calling them "conservative and responsible."
News of the plans, revealed in a Tuesday Securities and Exchange Commission filing by American parent AMR Corp. and reported in Thursday's Wall Street Journal, sparked outcry from American's unions, whose members this week approved concession agreements designed to help save American $1.8 billion a year in labor costs in order to avoid bankruptcy.
"This fund is the opposite of shared sacrifice and calls into question the basis of each of our contracts," said a statement by James Little, president of the unit of the Transport Workers Union which represents most ground workers at American, in a message to his membership Thursday.
"We have signed no new agreement, and in light of the disclosure in AA's SEC filing, we must reconsider whether we will sign off, even if the consequence is a bankruptcy. Unless the company reforms itself on the issue of executive compensation, there is no basis to cooperate in its effort to survive."
The Journal story quoted an American spokesman as saying the union leadership had been briefed on the program before membership voted in a ratification process concluded earlier this week. AMR CEO Donald Carty, in a letter to Little released by American, conceded that was not the case.
"Given the controversy surrounding other companies' handling of their [executive compensation plans]...and the fact that the company did not fully brief you...I can certainly appreciate the concern of your membership and your own strong feelings about our handling of the situation – especially at a time when you and your membership have done so much to help save this company from bankruptcy," said Carty's letter to Little. But he did not offer to make any changes in the plans.
"I agree that you and your members are owed an answer on the [compensation plans], and once the program is fully explained and examined, I think you will find it conservative and responsible," said Carty's letter.
The company has long had a pension plan for top executives that paid them amounts in excess of Internal Revenue limits on pension payments. But it had not funded the plans, instead making the payments out of general operating funds, said the airline's statement.
In October it decided to create a trust fund to provide some guarantees for executives due payments from that pension plan that they would receive payments even if the airline went bankrupt. The plan is about 60 percent funded, the company said, which is a greater level of underfunding than the company's other pension plans.
"[AMR] felt it was important to provide the senior management and their families with the same level of pension security as that of its other employees," said Carty's letter to Little in defending the plan.
The company also agreed to pay retention bonuses to six top executives equal to two times their base pay if they stay through January of 2005, and equal to 1.5 times base pay for a seventh executive.
Carty's letter points out that he took a 33% cut in pay, declined a bonus for three years and canceled his stock share grant. He also deferred his 2004 retention payment.
American also announced late Thursday that it had laid off 5 percent of management Thursday, and that it would cut management by another 5 percent by July 1.
"It is critical that management continues to lead our recovery," said a statement from Carty announcing the cuts. "Unfortunately, in what is certainly the most difficult outcome of this process, this means many individuals will no longer be active members of the American Airlines team."
While Little's letter to his members threatens to refuse to sign off on the concession contracts, even if it puts the airline into bankruptcy, his letter to Carty does not make that threat.
"I believe the failure to disclose the existence of this program was a material breach of the company's duty to provide relevant information, and I have asked our legal staff to determine whether there are remedies at law," said Little's letter to Carty. "In the meantime, I urge you to carefully examine the impact of the existence of this sort of program on the morale of your rank and file work force and the credibility of any notion of shared sacrifice to preserve American."
American would not comment on Little's threat that he made to members, saying only, "Despite some reports, the company has not received any indication that its unions will not sign the agreements ratified by employees this week."
Little could not be reached for comment Friday morning.
Screw Carty, the horse he rode in on and the Millions in pension security and "retention" bonuses.