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Will They Ever Learn?

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You would like to think that people who ascend to the CEO and director positions of Fortune 500 companies did so because they’re very bright people who also happen to have more than just a knack for business. However, a number of these individuals have recently done quite a few not-so-bright things that make you want to ask: will they ever learn?

Let’s take, for example, the folks who run American Airlines. As you may have heard, American has spent the week threatening to file for bankruptcy unless its three major unions agreed to wage concessions. (See American Airlines Unions Vote on Concessions.) Two of the three unions, the Allied Pilots Association and the Transport Workers Union, immediately voted for the wage concession package, while the flight attendants, represented by the Association of Professional Flight Attendants (APFA), originally rejected the concessions by a close vote. Amidst continuing bankruptcy threats and the claims that some flight attendants were having difficulty casting votes, however, American and the APFA agreed to a redo on Wednesday (4/16), and the concessions were ultimately ratified by a 52 percent to 48 percent margin. (See Flight Attendants Approve Concessions at American.) Some industry experts praised American president Donald J. Carty’s leadership of the airline through this potential financial disaster: one expert called this “Don Carty’s highest moment.”

Carty probably shouldn’t savor the situation for too long. While on Tuesday (4/15), the unions were struggling to have their members accept pay cuts, American quietly filed its quarterly report with the Securities and Exchange Commission, which contained a bombshell. Two significant and previously undisclosed changes were made to American’s executive compensation plan: a plan to pay the airline’s top six executives bonuses equal to twice their salaries if they remain at the airline until January 2005, and the creation of a trust guaranteeing parts of the pension plans for American’s 45 top executives in the event of a Chapter 11 bankruptcy filing. (See American’s Exec Pay Enrages Labor.) Union leaders, which had worked closely with American to encourage their respective memberships to ratify wage concessions, are understandably very upset, and one union leader has threatened to scuttle the deal his union just ratified. Jim Little of the Transport Workers Union said he will reconsider signing the new contract because American’s “failure to timely disclose” the changes was a material breach of its obligation to workers. John Ward, head of the flight attendants union, called American’s move “the equivalent of an obscene gesture from management to employees,” while APFA leadership has posted at the APFA web site the comment “APFA is outraged by these latest revelations, which extend even beyond the sorry course of conduct that the Company pursued throughout the past several weeks.”

While industry experts believe that American weathered this crisis, in part, due to lessons learned from the bankruptcies of United Airlines and US Airways, American obviously didn’t learn from Delta’s similar mistake less than a month ago. As reported here in the 3/26/03 blog entry, Delta disclosed in its quarterly SEC filing that it had paid its chairman and chief executive Leo Mullin $13 million in 2002, given its executives cash bonuses totaling $17.3 million, and created a special $25.5 million executive pension fund, during a year in which Delta lost $1.27 billion and was planning flight cutbacks. Then again, perhaps he did learn something from Delta–amidst all of the bad airline news, the hypocrisy of Delta’s announcement hasn’t seemed to generate that much outrage.

These moves aren’t limited to the obviously-struggling airline industry–they’re happening all over. As recently commented by Steven Pearlstein in the Washington Post, however,

It’s not just that many of the top guys got big raises despite a lousy year for most investors and negligible pay increases for most of their employees. More significantly, the proxies confirm that directors continue to accept the claptrap that the only way to attract and retain top executives is to lavish them with wealth way out of proportion to what other talented humans seem to require.

(See Outrageous CEO Pay Still A Sore Point.) And political cartoonist Tom Toles may have said it best today. (See Toles (4/18/03)).

It’s up to all of us to pay attention. Because it appears the oh-so-smart CEOs and corporate directors won’t ever learn.


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