I really thought this was going to die down eventually, but it hasn’t. The topic of profit-sharing at the new American (or lack thereof) has really angered a lot of people, and the noise is getting louder. There isn’t a simple answer as to whether profit-sharing is good or bad, so let’s talk about it.
Why am I talking about this now? Holly Hegeman had a great column about it in PlaneBusiness Banter (subscription required) this week, but it’s never the columns I agree with that get me fired up. It was this Huffington Post piece titled “More Labor Troubles at American Airlines” that really got me going. This piece quickly turns into an angry hate letter for American’s flight attendant union leader Laura Glading, and it’s full of accusations and bile. But I’m not going to waste anyone’s time picking this apart line by line. Instead, I thought it would be more productive to get to the most contentious issue out there now: profit-sharing.
Why American Doesn’t Like It
It is absolutely true that the leadership team at American doesn’t like profit-sharing. Why? The Huffington Post piece correctly notes that CEO Doug Parker said “It’s just
not the right way to pay 100,000 employees that don’t have that much impact on the daily profits.” But this is really just “gotcha journalism.” The piece leaves out the context for this remark. What came after that statement?
I know every one of you makes a huge difference. I’m not suggesting you don’t… But so much of it (our profitability) is tied to things like fuel prices, Ebola, and a bunch of things we can’t control.
And that is the gist of management’s argument. If people work harder, it may not lead to more profit. If there’s a war, or oil prices spike, or something else happens, profits can be wiped away and employee effort will not have resulted in any additional payment. That’s why American opted in the last proposal to just increase annual flight attendant pay by $50 million to account for profit-sharing. That would pay in good times or bad.
American believes profit-sharing was something created by airlines who had a lot of bad times. It gave them a reason to be able to pay less with the promise of higher pay when times were rosy. And in a highly cyclical industry like the airlines, that’s been a carrot used for years. The problem is that labor is only happy with profit-sharing when the airline is profitable.
Remember Eastern Airlines? After deregulation, it turned to profit-sharing in order to save money when times were tough. Times got better and it paid out. All of a sudden, an airline not known for having good labor relations had happy people. But then guess what? Red ink returned and there was no profit to be shared. Employees got angry and steamed that they were working harder to save the airline and weren’t being rewarded for it.
And so it goes, round and round. And that’s why it’s going to seem strange that I say this…
Why American Should Have Offered Profit-Sharing Anyway
I know, I know. If the argument makes sense to not offer profit-sharing, then why do I think the airline should have done it? It sounds like a bad reason, but it’s because every else is doing it.
American is a victim of the current point in the economic cycle. Right now, Delta is busy posting record profits and sharing it with employees. You’d think Delta CEO Richard Anderson was a god among men the way people talk about him. Of course Delta employees love the extra cash, but it’s the front line at American that you hear drooling over the guy. After all, Delta is making a silly amount of money and paying it out. The front line at American wants that money too.
But we all know the next chapter in this story. Bad times will return. For those who think the airline industry in the US is now going to be permanently profitable and times will always be good, you’ve been spending too much time in Colorado and Washington (or wherever the heck else weed is now legal). How many times have we heard that before? In the late 1990s, airlines were busy crowing about how profitable they were and how they’ve solved the cyclical nature of the industry. Bullcrap.
All we need is an oil-price spike, a big war, some pandemic, a recession, or really anything else to significantly impact air travel and the airlines will plunge back into the red. It’s just a matter of time. When that happens, Delta employees will be angry that profit-sharing doesn’t pay out. It’s just human nature to want it all. American flight attendants would then be able to laugh and say, “hey, we still got our $50 million.” But memories are short, and we are in a good time right now.
You can’t know for sure what profits will look like going forward, but the will of the American front line seems to be that they want to take a chance that things will stay good for a long time. It’s short-term thinking but it’s what they want. And that’s why American management should have gone for it. Who knows, it might even have ended up saving the airline money in the long run.
Why American Can’t Do It Now
With all this being said, the idea of profit-sharing has sailed in this round of negotiations. There were protocols set up to make sure the merger would push along at a decent pace, and American stuck to its no profit-sharing mantra with the flight attendants. Now that’s heading to arbitration and profit sharing isn’t going to come out of that. With that done, there’s no way that American could turn around and offer it to the pilots or to any other group. That would be very bad.
American’s decision to stick to its guns on profit-sharing means it can’t back off at this point. It would create more ill will with the rest of the workgroups than it would create goodwill with the pilots. This management team wants to be consistent in its dealings, and that means it has backed itself into a no profit-sharing corner. That may prove to be a good thing in the long run, but for now, that stance is just making the front line groups mad.
The saddest thing is the portrayal of airline employees’ reaction to profit sharing in infantile terms: “happy” when profit sharing in paid, “angry and steamed” when it isn’t.
In my view one of the contributors to the decline of private sector unionization in the U.S. is their tendency to paint the same company that is the source of their members’ livelihoods as a Machiavellian monolith intent on screwing their employees at every turn. How many people would want to spend their working lives at a company like that?
If the construct that airlines have to treat their employees like petulant teenagers is a given, seems equally defensible that profit sharing in the good times rewards employees contemporaneously with the company’s success, versus betting that the next contract negotiations occur during a time of economic prosperity.
As I see it, the problem in any industry with profit sharing (or other irregular bonuses) relates to the variable take-home salary that it causes. When times are good, everyone starts taking more money home. Very few save all of this temporary boost; many use it to buy new “stuff” with a credit card or to pay the down payment on a new car, a boat, or some other item.
The next year, when the bonus does not materialize, they have to continue making the payments from what seems to be a reduced salary. Financially, the employee is worse off than if they had never received the bonus.
It’s easy to adjust to a higher salary, it’s very difficult to adjust to a salary cut.
I wonder if there are any airlines or businesses who do profit sharing, but only into an employee’s retirement fund. This way it doesn’t vary the take home pay..
Yes, Delta’s profit sharing plan allows employees to put their profit sharing checks towards their 401K plans.
Is that default or required? Or is it an option.
It’s an option. You can put from 0% to 100% into your 401K
I see your point about unions enjoying the profit sharing when times are good and being pissed off when they don’t get them. But don’t you think it’s going to be that way whether they profit share or not? I seem to remember unions in the past throwing a fit and demanding new contracts if their airlines were making big bucks and they weren’t getting a cut of it. Isn’t that how Delta pilots got that great/terrible (depending on what side you were on) contract back in the late 90’s? Seems like an issue that will never go away, no matter what you do about it.
Ben in DC – Absolutely. It’s always the same when it comes to labor negotiations. Management wants to keep costs down, and labor wants to grab as much of the pie as possible. It’s the tension you need to have. And sometimes management gives too much and screws the company badly. The one that stands out most to me is United’s pilots in 2000.
They were given way more than they should have been given. When the low times came, givebacks were necessary for survival, but labor takes that high water mark as where it belongs even if it was a bad idea when it first happened. That’s why today you still hear people saying that they should get back everything they had before 9/11. The problem is that they never should have had what they had back then. So labor’s expectations are unrealistically high and people are bound to be disappointed when they don’t get it back. That’s a huge failure of management, and it’s not just a profit-sharing issue.
A few years ago, jetBlue paid some of its employees with stock options for a while, at one point, it made 10-15% of salaries, but eventually its stock performance tanked and employees, now used to their money from stock options, became unhappy. Eventually, management and pilots agreed on pay raises to make up for this loss of salary though.
If I were management, I would give out some irregular bonus when the airline hits certain thresholds on profitability or operational performance.
Stock options are a dubious form of compensation outside of specific industries, such as tech, where the eventual IPO makes up for whatever initial loss there is in wages. In many older industries, such as the airline industry, using stock options as a form of compensation MAY Be a nice bonus, but considering their historical performances, is effectively useless for many, and even more so if their retirement is tied to that performance, though my understanding is post-Enron vesting one’s retirements plans in company stock and the like is not allowable.
The only airline workers that should get profit sharing are the workers not in a union. They are the ones that usually lose out with lack of raises and/or benefits.
Perception is often more important than reality.
If you have the time, watch the 1987 classic “Wall Street.” If you remember the movie, as Charlie Shene sells the idea of bringing in Michael Douglas as an investor, Douglas proposes profit sharing to Martin Shene & the other union members at the airline.
CF, profit sharing is still alive at American for those at Level 5 (manager) and above. Administrative and support staff levels 1-4 (non-union, non-management) do not receive profit sharing. The profit sharing for Level 5, called something different as to not be confused with “profit sharing,” is 24% of salary. Once it hits Director level, it’s 50% and continues to climb the higher the position.
Also, Legacy AA employees who went through the bankruptcy received stock and get paid each time Doug decides to pay dividends and that’s a form of profit sharing. I agree with David SF eastbay’s post – pay profit sharing to non-union employees as they usually lose out, especially for the Legacy US employees who are still being paid below their AA counterparts.
Debby, first to clarify, David SF eastbay was saying that profit sharing should go to non-union employees only. But I agree with your other points to a certain extent. What Brett isn’t very honest about is that Parker / Kirby only dislike profit sharing for “low-level” workers; they love it for themselves and other high-level management because after all they have so much control over the price of oil and the other external factors cited. The level 4s who hung on through the layoffs and pay cuts were “rewarded” with having their profit sharing yanked; clearly they are viewed as expendable by this new, kinder, gentler management group. Also want to point out that pre-merger Brett was adamant that the merger and the new management team were the answer to legacy AA/US labor problems; not so much.
Realist – You keep saying that I think the merger will resolve all labor problems, but that’s not in any way true. This merger will resolve all integration issues that were still outstanding at US Airways. That’s a fact.
The employees will also be better off than they were without a merger. We can’t prove that since we don’t know for sure what would have happened had the merger not gone through, but I absolutely believe it to be true to this day. Things can change if management does something terrible to change the company’s fortunes, but there’s nothing I’ve seen to make me think otherwise.
But the idea that there will be permanent labor peace and everyone will be happy forever is downright silly. Now, back to your vitriolic rants…
Level 1-4 Mgmt employees at AA are not considered important. They are easily replaceable with people off the street.
Level 5+s are all MBA graduates and crucial to the running of the airline, hence the need to pay additional bonus and profit sharing.
Marcus, you are absolutely correct; MBA’s are perfectly educated and suited to run an airline.
Debby – It will be interesting to see how long that program continues at the various levels. I know plenty of people in corporate at US Airways who were unhappy to see the profit sharing plan canceled, but they did get a raise to compensate for that. Whether it’s worthwhile compensation is a whole different question.
But the higher up you are in the company, then the more direct impact you can have on profits. So I get the point of profit sharing at higher levels in theory. But it all goes back to the optics. If you’re going to take such a big stand, then you can’t really have a nuanced stand or people on the front line will just get pissed. And that’s definitely what’s happening here.
CF, correct! Employees received 2.5% in lieu of profit sharing. Levels 1-4 still can have a direct impact on profits. Consider that Shift Managers at the airports are considered Level 3 and small outstation Station Managers are Level 4. Though they are in charge of a workforce directly interacting with passengers, they do not receive profit sharing.
The front line and non-union, non-management staff are starting to see the true side of Parker / $cott.
Interesting take on profit sharing. I would love to hear your thoughts regarding the labor stalemate at Southwest Airlines. They seem committed to cost neutral contracts even at the expensive of federal mediation with at least two unions. But with 7 unions in negotiations and the AA and DAL pilots on the verge of lucrative contracts, what do you think is their end game? Is cost neutral a reasonable bargaining position right now for them, and if so, why?
FurloughedPizzaDeliveryGuy – Southwest is in a really tough spot, that’s for sure. The problem is that Southwest pilots are paid really well already, so I think it’s a defensible stance. Tough to say that now with Southwest again reporting record profits, I know, but at some point the contracts need to stop costing as much as they have. It’s just that nobody has ever really said “no” in the past, so it’s not going to be easy to get pilots or any workgroup to swallow it. I would not want to be in the middle of that one, that’s for sure.
CF I think you are wrong when you say that employees don’t like profit sharing when times are bad. I think what they don’t like and resent is that when times ARE bad, the executives (and upper level management’s) “profit sharing” plan doesn’t suffer too. All one has to do is read the proxy statement section on executive compensation to see how easy it is for them to rename “profit sharing” to something that allows them to get compensated regardless of the profitability of the company.
To paraphrase former president Bill Clinton, it all depends upon what your definition of “is” (profit sharing)… “is”.
In the companies that I have worked for that have had profit sharing, we all wanted to feel that everyone from the CEO on down profited when the company did well but also suffered with the troops when things were bad.
Keith – Well I agree with that for sure. They hate that, and they should hate it. I mean, it’s crazy to take incentive plan payments at the top level while others are seeing cuts. I can’t understand how people can do that with good conscious. (Maybe it’s because they don’t have a good conscious…)
But the front line still hates when profit sharing doesn’t pay out even if management isn’t paid either. When there’s upside, the front line wants to take all the credit for profit. We see that with many of the flight attendants right now. But as soon as the fortunes fall, then the front line doesn’t want to take any of the blame. It’s all management’s fault. That’s just human nature, I think.
Just a note for Brett, the word you are looking for is “conscience”. As in the managers that get bonuses during bad times and layoffs do not have a conscience. Jimminy Cricket was Pinochio’s conscience.
“Conscious” means awake. As in, I imagine few people would still be conscious after reading much more about grammar.
Back your regularly scheduled labor/management rant…
Your English Teacher – Wow, that is incredibly embarrassing. I’m a big grammar junkie myself and that’s a mistake I never make. Can’t figure out how that happened. But hey, since you guys can’t edit your comments, I’ll leave mine as it is, in all its cringe-inducing glory. Ugh.
Not sure I totally buy into your theory that profit sharing is a great way to reward and then anger a workforce. I might point out that Northwest only had profit sharing for its union workforce from the time the company exited bankruptcy to the merger (which was about 2 years). No one could claim that the loss of profit sharing caused all the labor issues there.
Back in the day when HP existed (you know now the largest airline in the world after it saved US and AA) … it started as an “employee owned”, profit sharing based airline. When things went south in 1990 after Kuwait was invaded, and pay freezes; then cuts were implemented; the percentage of pay cut increased as one climbed the ladder – it was fair (no one liked it, but we felt we were in the battle together). Once Ed was shown the door -post Chap. 11- that feeling disappeared. None of us ever got rich on the profit sharing when it did get paid. I would much rather have the “guaranteed – hahahahaha” payment than profit sharing as a line employee. One thing we did have going for us was the free drinks on flights ;)
I’m curious why there isn’t more of a movement toward performance pay. Incentivize employees for things they do control. (Customer satisfaction, on time performance, luggage handling, etc, etc.)
Nick, there are a few airlines who do operational performance incentive pay. Pretty certain that UA still does it, but not sure who else still does.
AA used to do it at different times (AIP and LEAAP). Last time around, some of the unionista’s at AA decided those payouts were an insult, and refused to accept or cash the checks. Don’t recall when they went away entirely…
American still has incentive pay that is based on operational goals. The program is called “Triple Play”. It pays out to all employees if certain operational targets are met and/or American is ranked highest in certain metrics (versus DL, UA and WN).
Delta also can receive incentive pay up to $100.00 a month for hitting 3 stats. We also have been getting 3-5% raises roughly bi-annually. I’m finally making more than I did before the pre-bankruptcy pay cuts of roughly 20%
Didn’t your pay cut begin in 2005 or earlier?
If you are just not making what you once made….you are still years behind factoring in inflation. In fact, you have continued with a PAY CUT!
Don’t your unionized pilots lead the industry along with unionized Southwest pilots?
You took a 24% cut, one was 10%, then they came back for another 14%.
Yep, and the Triple Play program was a US Airways program so it was gone from American before that.
Well Eric, if you call a AIP or LEAAP pay of $50 giddy time when the airline was making 100s of millions in record profits during the late 90’s not an insult, you must have been sampling your new stash of nugz on the 6th floor penthouse at lunch. This, after some of the front line were locked into 6 years concessionary contracts, while the AA Robber Barons at Centrepork were celebrating at the Manson in London with a Brinks truck of 100s in the gold claw tub….toss off mate.
The devil’s in the details and even most of your examples are hardly in the control of the employee. On time performance? There’s no way that I would tie my compensation to that, unless I want to be at the whims of weather and traffic control. Even customer satisfaction is dubious, because the reality is that complaints are far more likely to be filed than positive feedback.
The problem with incentive pay is that it’s very difficult to get right: you invariably end up incentivizing certain aspects of a job while ignoring others that may be just as important for overall performance.
It sounds like this merger has actually cost Legacy US Airways employees money, at least level 4 and below. Profit sharing death notice, insurance premiums doubling or more (obtained from a reliable source), and no equalization of pay (from above)…..it sounds like one of the main points of the campaign for DOJ support to approve the merger hasn’t been the case so far…..”it’s good for the employees”….or maybe it was “good for (most) employees”?
I can tell you from first hand experience that the lower management pay grades from Legacy US did indeed get the shaft. I was first demoted from the equivalent to a level 6 to a level 4 when pay grades were aligned so I don’t qualify for the incentive program. Profit sharing was taken away and I was given a 2% raise to compensate for that (doesn’t even come close IMHO). Now my insurance premium is going up from $80 to close to $500 a month for an inferior medical plan. My base pay is significantly less than my counterparts in Dallas with no real equalization in sight… I could go on. Please forgive me if I don’t have any sympathy for the union groups who are being taken care of. Especially the flight attendants who voted down their contract. Idiots. The view in PHX is that management hoping for a slow death by attrition so they don’t have to lay us all off when we’re no longer needed.
To echo Keith’s sentiments, I don’t think it’s so much that employees throw tantrums when things go south and the profit sharing payments dry up, but the perception that it’s only the peons that have to suffer, while executives continue to enjoy lavish bonuses. And let’s face it, AA’s rank-and-file still haven’t forgotten or forgiven that untimely Don Carty executive bonus plan, which I’m sure factored into the voting to some degree.
It’s amazing just how many companies screw up the optics of profit sharing. Even my old employer messed it up. When you’re telling the foot soldiers that AIPs are being cut because of the “challenging environment”, that isn’t the best time to continue double digit increases in partner unit values or announce that you’re building a $350 million training facility.
This is obviously a difficult issue to deal with. Philosophically, I agree with management that profit-sharing doesn’t make a lot of sense for front-line employees. Their contributions, no matter how meaningful, are unlikely to affect profitability, and their lower household income levels make them less able to weather the vagaries of airline profitability.
That said, I like the idea of “sharing the wealth” with employees, especially in an industry like the airlines where profitability is likely to be quite variable due to external factors. I always think of Gordon Bethune personally handing out profit-sharing checks; it builds camaraderie — “we’re all in this together” — and helps defuse the industry’s common management v. labor mentality.
I also think the gesture matters more than the actual amount. I think it’s a bad idea for the profit-sharing payouts to ever average more than 5% of an employee’s annual take-home pay, even in good years; this should truly be an “unexpected” windfall bonus, not something an employee should count on to pay the bills.
Finally, I think optics matter. Everybody knows the industry is now experiencing hyper-profitability. I can understand your belief that this may be temporary, and that’s certainly true to some extent: there’s no question that a highly contagious virus, a massive terrorist attack or some other black swan event MIGHT derail the current profit environment. That said, the fundamental industry changes — largely brought about by the vision of current AA management — mean that the airline industry is likely to be much more profitable in the next 30 years than it has been for the last 30 years. Taking away employee profit-sharing now gives the appearance — rightly or wrongly — that “management is being greedy.”
Of course, as you’ve noted, if you’ve already taken away the profit-sharing from one unionized work group, it’s very hard to give it to another group. A tough problem, in need of a creative solution. What if you extended some sort of modest additional profit sharing bonus to EVERY employee, unionized or not?
“……..and their lower household income levels make them less able to weather the vagaries of airline profitability.” Surely you are not referencing triple 7 and 330 pilots?! Admittedly, these pilots are notorious for pleading poverty, but let’s get real.
United has figured out how to give employees the illusion of profit sharing while screwing them at the same time. When times are tough, a profit sharing program is introduced and doesn’t pay out. When the airline’s performance improves and the payouts start, management restructures the profit sharing program so it isn’t as generous. Each year of increased profitability leads to a smaller portion of profits being distributed to employees. I’ll take fixed pay any day over the illusion of an airline profit sharing program.
The pilots and FAs for American screwed themselves when they agreed to certain terms in the merger talks. They were SO angry with American’s management, and SO eager to screw them over by forcing the merger with US, they never realized they were not helping themselves.
That’s what happened, IMO. The unions were given the chance to agree to something with US if it would force the AA management out, and they jumped at that chance. Be careful what you wish for, because now it’s a different group but just as hard to get concessions from.
You guys should vote and think with your brains, and stop trying to “get” American for what happened ten years ago.
So the unions all fairly unanimously refused to take profit sharing during restructuring. Working for a bankrupt company that hadn’t had a sizable profit in years, I guess this makes sense. Now that the company is making billions, they’re pissed they’re not getting their share.
Sorry, I have little sympathy for them. Completely their fault, and completely shortsighted on their part.
Should be paid in addition to—–not either or—–
I always thought that when UAL management gave the pilots the 2000 contract (after the summer from hell) that bankruptcy planning was already in play. It wasn’t rational that the company could continue paying them those rates going forward. I would say that the pilots have the best leverage of any of the groups for affecting the bottom line (going back to the summer of 2000) due to their ‘closeness’ to the maintenance logbook.
Also, thanks for reminding me about the UAL profit sharing plan where they changed the rules after times went from bad to good. Kind of like privatizing the profits and socializing the losses.
Flight Attendants and Pilots have separate unions from other work groups at USAirways/American Airlines. The profit sharing controversy is valid for Flight Attendants i that they would rather higher pay scale than the profit sharing …and why not? They have been at a standstill since TWA marriage? My question is….the “other” workgroups, i.e. CSA, Ramp, Reservations, etc. who have been without pensions since 9/11 and look forward toward profit sharing will continue to focus on the 4th quarter of 2014 being as profitable as the first 3 quarters of 2014. Will the profit sharing check continue to be in effect for year end 2014 for this workgroup providing worker worked the full year of said profit ? Will they get the checks?
For 2015 profits, with check cut in 2016…thats another story…..
Hrm. I’m wondering if perhaps the line of “profit” should be moved.
Instead of just being “profit” perhaps it should be “windfall profit” Management & Labor would agree upon an expected profit percentage (say 8%?) would pick and if the profit level was at or below that there’d be no profit bonuses, but if the profit percentage was crazy high 14% there’d be a percentage of that (maybe 10-25% that’d be reserved for employees.)
This way management would be responsible for some profitability, but if things went crazy gangbusters employees would share in that too.
Here’s the rub about profit sharing from the low level US Airways management side of things; it was a sizable bonus at the end of last year (>5%), and would have been substantially better this year. Going into the merger it was fully expected that both companies would post profits, even with merger related costs. There’s no annual bonuses (holiday or what have you) and the paltry raise that was given in lieu of profit sharing, while appreciated, is a huge step back from expectation. Now AA/US is a year in, posting huge profits by recent standards and returning little/nothing to staff. You can see why one (many?) might be a little peeved.
Ok….so just get rid of profit sharing for EVERYONE! Management included. This should also include bonuses and stock options, any kind of extra, incentive pay. Because NO ONE has control over gas prices or ebola or some other fixed cost or crisis!
I work for Delta and think profit sharing is the way to go. We aren’t under any delusion that it will be like this every year. We enjoy the good times but we also enjoy the fact that when things get tight the company is also protected against paying wages it can’t afford. This could mean the loss of your job. Profit sharing is a great incentive for employees to keep costs from waste down. It’s also incentive go the extra mile to get flights out on time and keep our customers as happy as we possibly can. I see the positive results everyday. Delta people really take ownership in our company.
This is BS Doug Parker…. Profit sharing is a way to show employees trust, by showing us that a company values their employees by giving them everything that they can when they can afford it. It is a great way to prove that when the airline is making substantial money, that it isn’t all going to the top of the chain. Nobody wants to hear about a CEO making bank. They want to see that money is passed on to the employees and into the economy. Since airlines’ profits are so influenced by real world things, why does the CEO get to celebrate it all. Doug Parker isn’t responsible for the acts of god. He didn’t do anything to stop 911. Profit sharing is for the generous leaders who want to make pyramid shemes a thing of the past.