Banal Retention 

Turbulence in American Airlines’ Executive Suite

Turbulence in American Airlines’ Executive Suite

“I stumbled.... I made a mistake.” This was Donald J. Carty’s account of events that led to his abrupt resignation last week as chief executive of American Airlines. Carty’s two-decade career at American crashed and burned after the airline’s belated disclosure of lavish retention bonuses for executives at a time when unions for pilots, flight attendants, mechanics and baggage handlers were signing off on concessions amounting to more than a billion dollars in wage cuts and the loss of thousands of jobs. The concessions were supposed to avert financial bankruptcy for the airline. Moral bankruptcy is perhaps another matter.

The retention bonuses American’s board approved (Carty was chair) promised cash payouts totaling twice the annual salary for some key executives if they remained with the company through 2005. For Carty himself, the bonus would have amounted to $1.6 million. The airline’s board also kept under wraps a decision to put $41 million into a pension trust for top executives that would protect their retirement income in the event of bankruptcy. Although approved many months ago, neither perk was disclosed in SEC filings until after unions approved painful concessions. (The airline was due to disclose before the union votes, but requested a filing extension.)

What Carty pitched as a regrettable misstep in corporate communications, flight attendants union president John Ward called a “money grab.” Pilots union chief John Darrah described his members as “irate.” Indeed, the airline’s behavior on its face seems so disingenuous and calculated to undermine employee morale that it raises the question of whether there’s something we don’t know. Is this just another example of what the British commentator Will Hutton has called corporate America’s “orgy of unprecedented fraud, plunder and malfeasance”? Or is there more to the story?

One place to look for an alternative view is to those who would defend the airline’s actions. This is a breach into which The Wall Street Journal cheerfully stepped last week with an editorial that wrist-slapped Carty’s method (the disclosure was “unfortunately timed”) but defended the larger principle: “There was nothing to hide or be ashamed of.” Given the volatility and dire financial straits of the industry, “American directors rightfully worried that Mr. Carty and other experienced hands would jump ship or take early retirement.”

Cooler, or at least more nuanced, heads prevailed elsewhere in the kingdom of market worship. The National Review’s William F. Buckley Jr. called American’s subterfuge “politically stupid,” and observed that, “you don’t do that, imposing on a subordinate a sacrifice you don’t impose on yourself.” Perhaps just a touch of moral relativism seeps in as Buckley goes on to trivialize worker outrage as “economically futile given the iron laws of the marketplace.”

As aerospace industry investment executive William Alderman put it, it may be a “classic Catch 22.” Alderman says that without compensating top executives for “the substantial risks they are taking and the very hard work ahead, many will resign from the company.” But worker reactions to such payments could make it “nearly impossible” to achieve essential cost reductions through employee wage concessions. Even union leaders, often caricatured in corporate media as opportunistic hotheads, get this point.

The problem, however, is that “retention” looks suspiciously like the latest corporate code word for the endemic avarice that infects America’s executive suites. Those sympathetic to American’s actions argue that the airline’s abysmal financial performance is echoed throughout the industry, and that performance would be even worse without the executives struggling to keep the carrier afloat. But what is clearly pervasive is stratospheric compensation: Last year, the pay package for Continental’s CEO totaled more than $14 million, a 172 percent increase during a year when the company lost $451 million. Delta’s CEO received $13 million, doubling his pay, while the firm was losing $1.3 billion. Even granting the general principle that high-priced talent is often worth retaining, when is the line between ample and obscene crossed? Do the boards and executives who traffic in such rapacity realistically expect employees with mortgages, kids, bills and uncertain futures to acquiesce?

A frontline view comes from Robert Held, an American pilot (and decorated military veteran) with 15 years’ experience in the cockpit who flies international routes. Held tells the Scene that the bonuses and lack of disclosure were “underhanded” and “entirely consistent with American’s unethical and arrogant approach to its employees.” Held concedes there may be some top executives worth retaining, but the broader issue is an ingrained “culture of deceit and dishonesty among middle and upper management.”

“It was not my intent to mislead anyone,” Carty insisted after the story broke. Given the airline’s affirmative steps to delay disclosing the perks until after the unions approved concessions, Carty’s assertion is preposterous. Held, the pilot, says that morale at the airline is “horrible,” and that employees—already uneasy about the uncertainties of bankruptcy—have strong emotional feelings about the conduct not just of management, but of the unions, press and politicians too.

The airline’s new CEO, Gerard Arpey, spoke last Friday of a “definite need to rebuild trust within our company.” But trust is something earned, not built. Although the retention bonuses were cancelled in the firestorm, the executive pension guarantees remain. One anticipates more turbulence ahead.

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