Unions Knew About Trusts
Couldn't Tell Rank and File Under Confidentiality Restrictions
Unions Knew About Trusts - Couldn't Tell Rank and File Under Confidentiality Restrictions
Carrier Created Pension Trust to Protect Portion of Executives' Retirement Income
By SCOTT MCCARTNEY, THEO FRANCIS and JOANN S. LUBLIN,
Staff Reporters of THE WALL STREET JOURNAL
Amid intense cost-cutting last year, American Airlines' parent, AMR Corp., funded a supplemental pension trust for its top 45 executives that protects a portion of their retirement income in the event of a bankruptcy filing. The world's largest airline also offered its top six executives "cash retention" bonuses of twice their base salaries if they stay through January 2005.
The executive perks, similar to ones at other airlines that drew fire from Congress and unions, were disclosed late Tuesday in exhibits attached to the company's year-end financial filing. AMR, based in Fort Worth, Texas, had delayed filing the report because the company was negotiating pay and benefit cuts with its unions. The filing coincided with the scheduled end of voting by workers to ratify $1.8 billion worth of concessions to avoid a bankruptcy filing.
A similar pension trust arrangement at Delta Air Lines, along with other compensation disclosures this spring, drew so much fire that CEO Leo Mullin agreed to forgo some compensation.
American defended its supplemental pension program. Bruce Hicks, a company spokesman, noted that the executives' primary pension program would be at risk in a bankruptcy, just like other employees. The supplemental program funds pension benefits above the regular employee program, and is actually similar, the company said, to a trust American's pilots have for supplemental pension benefits.
"Different pension programs are funded at different times and the decision was made to fund this one then," a spokesman for American said. The company declined to disclose the cost of funding the pension trust.
The company also said it briefed union leaders before the voting, but under confidentiality restrictions, on all aspects of executive compensation, including the supplemental pension funding and the retention bonus program. AMR said it set up the cash retention program for executives in March 2002. The program will pay six top executives twice their base salaries and a seventh executive 1.5 times base salary for staying with the company. Half of each retention bonus will be paid Jan. 30, 2004, and the remaining half on Jan. 31, 2005.
Chairman and Chief Executive Donald J. Carty's base salary is $811,000 a year, so he stands to earn a retention bonus of more than $1.6 million. As part of cost-cutting agreements from unions, Mr. Carty offered to take a 33% cut in that base salary and forgo any bonus this year, for the third consecutive year. He also said he asked AMR's board to defer his 2004 retention bonus to 2005, and cancel other elements of his compensation.
"Even with the retention agreement approved by the board in the aftermath of 9/11, Mr. Carty's compensation is substantially below that of other CEOs of Fortune 100 companies," American said in a message to its employees about executive compensation.
Employees still are likely to be angered, at the programs and at the timing. The retention-bonus program "is presumably hedge money -- coming on top of other long-term incentives," suggested Brian Foley, an executive-compensation consultant in White Plains, N.Y. "Management is making more money when other [American Airlines ] people are being asked to take less. There's a certain inequity there."
Most troubled companies don't bestow retention bonuses until after they have entered bankruptcy-law protection. Stay-put awards for senior management range from 35% to 200% of an individual's annual salary, concludes an analysis of six concerns in bankruptcy proceedings by Alan Johnson, managing director of New York pay consultants Johnson & Associates.
Generous executive-pay programs on the eve of a company's bankruptcy have come under fire at Kmart Corp., Enron Corp. and elsewhere. But several airlines have paid retention bonuses through the severe industry downturn to hang on to executives who might find higher earnings in other industries, especially since stock-based compensation has been devastated.
Mr. Hicks said the program is "conservative" by industry standards, and he noted that American had already lost several senior executives to retirement and other jobs. Indeed, three top American executives have retired since Sept. 11, and Chief Financial Officer Tom Horton left for AT&T Corp.
AMR's Supplemental Executive Retirement Program is similar to one at Delta Air Lines that sparked controversy. Up to last October, the pension benefits earned by the top executives at AMR under a 1985 pension plan were at risk if the company were to enter bankruptcy. However, on Oct. 14, 2002, the company created an irrevocable trust, run by a committee of the top four executives, to hold the undisclosed millions of dollars in executive pension benefits that the 45 executives had earned through that date.
The trust agreement clearly establishes that the trust's assets "shall not be subject to the claims of the creditors of the corporation in a bankruptcy or other insolvency."
The trust administrators -- Mr. Carty along with President Gerard Arpey, Chief
Financial Officer Jeffrey Campbell and Susan M. Oliver, senior vice president
for human resources, also get paid an undisclosed amount for their efforts.