AA Management Bonuses - Despite More Losses

[jimntx]

Executive bonusses are a fact of life in today's business environment. My problem is with the measure for awarding the bonusses--stock price.

This is the very type of bonus arrangement that resulted in the Enron and WorldCom scandals. "If stock price is the measure, then I will do whatever is necessary to inflate that stock price."

I'm not saying the AMR stock price is artificially inflated, but stock price is not always based upon rational reasons. The recent rise in our stock price is based more upon future predictions/expectations of company performance rather than current performance.

 

[TWU informer]

My compensation re: pay and benefits have also been deferred and placed at risk.

This is the ultimate slap in the face of the hard workers at AA who have sacrificed so much to make that stock price jump.

I wonder what the bonus scheme is when profits are reached?

Stay tuned, it will be exposed soon enough also.

 

[PRINCESS KIDAGAKASH]

They're sharing(bonuses), You're sacrificing(pay+benefits)! We're pulling, They're winning! Just Vote Yes and be lucky you have a job!

 

[FWAAA]

FWAAA -

Your post is well taken. However, I am of the opinion the pendulum that is AA's ability to dictate terms to its unions is about to swing back the other direction. Without the benefit of a crystal ball, I cannot predict with any certainty when this shift will be recognizable, but if history is an indicator, it will happen.

Experience has taught me to never underestimate what AA is willing to do in the pursuit of revenue.

I agree with you - the pendulum will probably swing back the other way eventually. Dunno when.

In related news, the AP has now butchered the news by reporting that the management payments could exceed $500 million:

American Airlines Executives to Get Bonuses Despite Red Ink Due to Strong Parent Showing

FORT WORTH, Texas (AP) -- Executives at American Airlines are expecting April stock-based bonuses that could total more than $500 million because shares of parent AMR Corp. have risen despite heavy losses at the nation's largest carrier.

About 1,000 employees from top executives to mid-level managers are expected to receive bonuses under a plan that AMR's board approved in 2003.

The amount of the bonuses will be based on AMR's stock price in April. At AMR's current stock price, they would range from about $2,000 to about $1.7 million for Daniel P. Garton, the airline's executive vice president for marketing.

Chairman and Chief Executive Gerard J. Arpey did not take part in the bonus plan.

The plan was written in 2003, when AMR hovered near bankruptcy, and it rewarded executives and managers if AMR's stock performed as well or better than that of other airline companies through the end of 2005. During that time, AMR shares gained 169 percent.

As previously disclosed in regulatory filings, management employees were given units that will vest in April at a strike price of $5. AMR shares fell 31 cents, or 1.4 percent, to $22.20 in afternoon trading Friday on the New York Stock Exchange.

Senior Vice President Jeff Brundage said in a letter to the management employees Thursday that, assuming a share price of $20 in April, the value of employee bonuses could top $568 million.

The bonuses "reward managers for superior performance," Brundage said. "Our compensation policy is designed to hold managers and executives directly accountable for the company's performance by placing a significant portion of your total compensation at risk when the company does not meet or exceed predetermined performance goals."

http://biz.yahoo.com/ap/060106/american_ai...nuses.html?.v=2

The article contains numerous mistakes and falsehoods. The $500 million plus is the amount of the rank and file options, not the management deferred comp.

 

[eolesen]

Executive bonusses are a fact of life in today's business environment. My problem is with the measure for awarding the bonusses--stock price.

Jim, unless I'm missing something, the stock price isn't the metric used to determine how many options were awarded.

The number of options granted to each person (including the rank and file) was determined several years ago.

The only reason the stock price is relevant to the discussion is because there's now a 175% difference between the current street price and the grant price.

If the stock were still performing in single digits, this "news" wouldn't have even been worth reporting.


While Dave laments the fact that some people already cashed out of their options to make basic ends meet, I don't think there are nearly as many who have done so.

Before Dave or Bob ask me to prove it... use the $583M figure mentioned above, divide it by the $17 difference between grant and street, and you've got 34.3M employee options that haven't been exercised yet. That's around 380 shares per employee on payroll today.

 

[AMFAMAN]

AMR shares jumped 169 percent from 2003 to 2005.

The stock has soared despite another year of red ink. Analysts expect the company to report losses of $600 million to $800 million for 2005 when it releases its quarterly and year-end reports Jan. 18.

Because AMR shares were the industry's best performers, each unit will be worth 175 percent of the value of one share of AMR stock the day they vest, Bailey said.

Am I reading this right, the bonus plan calls for 175% of the share price upon cashing it in, or are they talking about the 169% increase in share price - big difference. The first means they sell at $60+ a share.

 

[FWAAA]

Am I reading this right, the bonus plan calls for 175% of the share price upon cashing it in, or are they talking about the 169% increase in share price - big difference. The first means they sell at $60+ a share.

The way I read the news article quoted in the OP, the performance units granted to the execs provide for a variable percentage of the current market price and that since AMR's stock was the top performer in the industry over the relevant period, the execs get 175% of the market value per share per unit, or about $40 per unit (which makes sense, since 175% of current price of about $22 equals about $40), not $60.

As is typical in news articles, the 169% increase in AMR stock price is a red herring not really having anything to do with the calculation.

It sounds like the 175% figure is an arbitrary multiplier that is applicable since AMR is the top stock price performer. I assume that the multiplier could have been 100% or 125% or 150% if the AMR's ranking was somewhere other than on top.

 

[TWU informer]

Am I reading this right, the bonus plan calls for 175% of the share price upon cashing it in, or are they talking about the 169% increase in share price - big difference. The first means they sell at $60+ a share.

This looks to be the same kind of accounting as the "weighted average wage increase" of the TWU International pay increases. Only with them, it is a concession and then a snap-back that pays big time.

What a great idea!

Get a bonus plan that pays out on stock price increase rather than profit. Then take the company to near bankruptcy and drive the stock to below $2. Then claim a 175% increase in stock price prize and call it incentive award pay instead of a bonus.

Wow, that needs a Congessional Investigation and a new law? Nah, the congressmen likely taught the Exec's how to pull this one off.

Regardless...

Anyone receiving multi-million dollar "awards" while employees are under concession agreements and state, city, local governments and tax payers have been taken for corporate handouts is disgusting and should be illegal if not already.

 

[AMFAMAN]

since 175% of current price of about $22 equals about $40), not $60.

My bad, I was doing 175% in addition, so it is closer to $38.50.

 

[jimntx]

Jim, unless I'm missing something, the stock price isn't the metric used to determine how many options were awarded.

The number of options granted to each person (including the rank and file) was determined several years ago.

Yes, you are missing something. You are confusing the options granted with an executive bonus plan. The current bonusses have NOTHING to do with how many or what price options were granted. Those options had to do with the 2003 re-structuring. These bonusses are awarded from a bonus plan that dates back to 1998 (IIRC). That plan awarded bonusses based upon percentage improvement in stock price. (AKA "improving stockholder value").

This conveniently makes them eligible for the bonusses unlike the bonus plan based upon profitability.

 

[TWU informer]

This whole scam from 1998 is far worse than the undisclosed SERP plan that left Carty outside looking in.

Why there is NO backlash from employees and labor group leaders has to go down as the great mystery of recent times.

Someone needs to ask Jim Little why he was outraged over the SERP and yet remains silent on the 1998 management award plan.

 

[AMFAMAN]

These bonusses are awarded from a bonus plan that dates back to 1998 (IIRC). That plan awarded bonusses based upon percentage improvement in stock price. (AKA "improving stockholder value").

This conveniently makes them eligible for the bonusses unlike the bonus plan based upon profitability.

So in theory they can dump the stock price from its 1998 high of $82+ a share to its 2003 low of $1.25 and because it climbs back to $22, they claim victory and take bonuses. What about docking them for the $81 a share lost from 1998 to 2003. Heck SWA shares actually doubled in price in that timeframe.

 

[FWAAA]

Anyone receiving multi-million dollar "awards" while employees are under concession agreements and state, city, local governments and tax payers have been taken for corporate handouts is disgusting and should be illegal if not already.

Honestly, I think you are capable of formulating a more reasoned objection to this deferred comp plan than the rant above. Seriously.

If it were up to me, I probably would not have approved a plan that rewards management for increases in stock price from a "near-bankruptcy" low. But I'm not on the Board of Directors, and they didn't ask me.

Illegal? Hardly.

Disgusting? Sorta. But this ain't nothing like the payouts at the bankrupt carriers. Had AMR filed Ch 11, management would have sought (and likely would have been granted) even larger retention bonuses.

Look at the thieves running UAL - they want to take a sizable percentage of the new stock in UAL (after the old stock is canceled) for themselves rather then the creditors they screwed. They recently agreed to take a smaller percentage than their initial demand, but IIRC, the creditors are still planning to object to the size of that money-grab at the hearing this month.

 

[TWU informer]

Honestly, I think you are capable of formulating a more reasoned objection to this deferred comp plan than the rant above. Seriously.

If it were up to me, I probably would not have approved a plan that rewards management for increases in stock price from a "near-bankruptcy" low. But I'm not on the Board of Directors, and they didn't ask me.

Illegal? Hardly.

Disgusting? Sorta. But this ain't nothing like the payouts at the bankrupt carriers. Had AMR filed Ch 11, management would have sought (and likely would have been granted) even larger retention bonuses.

Look at the thieves running UAL - they want to take a sizable percentage of the new stock in UAL (after the old stock is canceled) for themselves rather then the creditors they screwed. They recently agreed to take a smaller percentage than their initial demand, but IIRC, the creditors are still planning to object to the size of that money-grab at the hearing this month.

Oh yes!

They didn't steal as much as others, so this makes the award bonuses OK!

Oh brother :angry:

 

[FWAAA]

So in theory they can dump the stock price from its 1998 high of $82+ a share to its 2003 low of $1.25 and because it climbs back to $22, they claim victory and take bonuses. What about docking them for the $81 a share lost from 1998 to 2003. Heck SWA shares actually doubled in price in that timeframe.

I hate to be a stickler SOB but with the SABRE spinoff in March of 2000, the AMR stock value decreased to account for the value of SABRE distributed to stockholders and the large cash dividend paid as part of that spinoff.

Doesn't negate your good point, but does lessen the amount of decline from 1998 to 2003.