American CEO Doug Parker said yesterday he was giving up his annual salary and bonus and instead just going to take his pay in stock. That way when the stock does well, he does well. What do you think about that? Is that a good way to pay a CEO or not?
Topic of the Week: American’s CEO Gets Paid Only in Stock
30 comments on “Topic of the Week: American’s CEO Gets Paid Only in Stock”
If this is meant for long-term investment in AA, then absolutely. If the motive is short-term gain and dividends, then what’s best for the stock may not be what’s best for the airline.
It’s just a gimmick. He’s still grossly overpaid in relation to the average airline employee. Now, if he were to take the bulk of his salary and use it to increase the pay of the people at the bottom of the company, that would be something worth writing about.
AA has 100,000 employees. If he took all of his cash compensation from last year he would be able to give every employee about a $50 raise. Even if he only gave it to the bottom 10%, it would be about $500. He is actually pretty underpaid especially when comparing outside the airline industry.
Only if you accept that the massive salaries that CEOs make in the US are reasonable.
Even a $500 raise wouldn’t be that big a deal to me (I am happily reasonably well-paid after 25 years in my field), but it would be meaningful if it came from the big boss as an expression of gratitude for good work.
I think it’s a good way to pay a CEO.
The one time I saw him at the company Christmas party he was double fisting Buds, though there was better beer available. This is not a knock on his drinking related issues (I’ve been dumb and driven under the influence so would be hypocritical to criticize) but might reflect his tastes; I think you could pay him in burlap scrip and he would still do as decent a job as any other overpaid CEO and not complain or need much more than a simple macro brew every once in awhile. Sorry for the backhanded compliment but the Buds are what I most remember about him.
Excuse me Eric…Budweiser is the King of Beers! Altho you have a point is in saying better beer was available. Since Parker is in Texas now he should be drinking the national beer of Texas, Lone Star, which beat Budweiser, Miller and all other domestic pilsner beers in a Consumer Reports Beer Taste Test.
The only thing that may be slightly contradictory is his statements about bonuses to employees where he stated that tying bonuses provides an uneven / possibly unfair compensation package when things aren’t going well, at no fault of the company (i.e. oil price hikes, volcanoes, etc.).
So, if you are a hater, this is another example of hypocrisy on his part.
If you want to give him the benefit of the doubt, he’s saying he’s rich enough to take the risk and the deterministic income he is giving up could be better spent within the company.
There is also the question of whether or not improving the stock price of a company is actually beneficial for the company.
What probably surprised me most about the article is the statement that he’s being paid 20% less than his peers at UA and DL.
Overall, while I think there is definitely some ‘show’ aspects of this, I think it is good message overall.
I think part of the point is the CEO can have an influence on how a company is prepared for and reacts to those externalities.
I haven’t run the whole economics thing, but lets say that oil prices sky rocket, but demand stays or even grows, AA might be in a better position for this versus DL given DL’s affinity for older airplanes. Sure DL owns most of those and can park em, but they might end up leaving money on the table that AA can take.
Airlines are announcing record profits this year because of lower fuel pricing and higher fares.
Why now? He should have done it when they were bankrupt.
In fairness, Parker was not CEO of American Airlines prior to/entering bankruptcy, but of their fully solvent merger partner, US Airways, so how exactly was he to do that?
And before that he was the CEO of US Airways’s solvent merger partner America West. Doug has built a good team.
Interestingly, the person who hired most of the America West / US Airways / American Airlines management team was Bill Franke.
I’m curious if this isn’t focused far enough in the future. The real question is 3 years far enough in the future?
I think perhaps 35% should be focused on the next 1 to 3 years. The next 25% should be focused on the years 4 to 6 years. The next 20% should be focused on the next 7 to 10 years. The final 20% should be focused on the next 11 to 20 years.. Yes thats a long term, but CEOs should be thinking long term, not short term.
I agree that a CEO should be focused on the long term, but investors want their portfolio value to increase NOW. It’s the job of the CEO to keep investors happy.
Not me. I’m an investor, and I’d like things to keep appreciating steadily over a long time horizon–I’ll have to retire on those investments, some day.
I think your generalization is common, but not really true. Sure, speculators want to pump-and-dump. But a heck of a lot of market capital sits in mutual funds whose ultimate owners mostly want medium- to long-term growth.
I have no problem with putting a CEO’s pay at risk. No one is forcing Parker to change his method of compensation. If you read the SEC filing, regardless of the stock performance, Parker will get at least as much as he would have earned in salary without the new compensation program, so the risk is mitigated to some extent. As has been mentioned elsewhere, airline executives tend to make less than their counterparts in other industries.
Most CEO’s of public companies are grossly overpaid in the United States, and there is much research to suggest that (a) those CEO’s are completely replaceable by others with the same skills, at significantly lower pay, and (b) that CEO pay rarely reflects the actual success of the company. To that end, I don’t blame the CEO’s, but rather the inept Boards and institutional investors who fail to do anything about it.
The problem of being paid in stock, of course, is that it means the primary motivation of the CEO may be to increase the stock price, rather than build long-term value. We have seen this play out with spectacular failures across industries in the United States.
The best way for CEOs to get paid is as a simple multiple of the lowest paid worker, with a performance bonus if targets are met. Americans think that’s communism, but in fact it works to retain good staff, keep labor negotiations in line, and builds a significantly better company in the long term. American’s appalling management record should be a very important benchmark when it comes to paying executives in a still poorly performing carrier.
Um, since when was American poorly performing?
For around 20 years of financial mismanagement, terrible labor relations, overpaid executives, an atrophying route network, old inefficient planes, and not a modicum of investment either onboard or on the ground until the past 24 months. The fact that the CEO of US Airways is starting to get them out of this mess is irrelevant; he has two decades of Board ineptitude to wash away.
Joe, you said “STILL” poorly performing. IMHO, that’d restrict your look back period to say a year or so, not twenty years!
Fair enough. But in the scheme of things, 24 months is a blip in a long line of failure. And to be honest, as far as this consumer is concerned, they remain among the least pleasant airlines to fly. That’s poor performance in my book.
I have mixed feelings. Stock options were basically setup as a way for C-level exec’s to get a tax break. Cap gains taxes are less than income taxes after all. The whole tax argument aside, tying pay to stock in many cases has CEO’s doing things to better the stock price and not necessarily the company and its employees. Ever notice how companies that announce massive layoffs see a bounce in their share price? Now as a stockholder (not in AA) I do want the CEO to at very least concern him/herself with the share price, but long term value, not a 6 month pump to better the cronies on the inside.
Personally I think pay and incentives need to be tied to a basket of variables, including much more than just share price or even profits alone. Parker is no fool and will probably be making more money than everyone on this comment string combined. I’m ok with that providing he’s doing good for AA. When someone profits at the expense of others, i.e. layoffs, is when I have a problem.
Bingo!
That elusive 15% tax rate is the reason!
I seem to remember Doug doing something like this as the CEO of US. I don’t recall the specifics though.
Do you have that somewhere, Cranky?
As for stock doing well, it is possible to gut a company, and raise the stock price in the process. Is that what’s happening here? I doubt it.
Doug is showing his employees that he believes in them, and their ability to succeed as a combined (fully-integrated) airline. Whether he told them that or not (this time), I don’t know. As I mentioned already, this sounds familiar.
Former US Employee – Well, he did take no salary after 9/11 at America West. I don’t recall if that happened at US Airways as well, but it might have around the oil spike in 2007/2008.
Gross CEO pay is one of the major factors of middle class decline, Im curious what other tax incentives there are from throwing yoru salary into just stock. Noone does something for just the good of the company
I agree that there is the potential for abuse when the CEO receives his pay purely as stock. However, there are also good examples, i.e. when Steve Jobs returned to Apple. (I think his deal was $1 in salary, use of the company plane and a few other benefits, and stock). The outcome really depends on the CEO and his/her character.
What I’d like to see, and I’m not sure if we’ll ever see this, is executive pay tied to long-term performance of the company, say 7-10 years. I’m not sure how this can be done, but perhaps some form of deferred bonuses depending on company performance years down the road.
Any compensation system can be abused. A lot depends on the character of the executive and the board.
I am currently overseas until the 3rd of May, with limited access to emails.
I’ll try to reply on the hoof, or else will get back to you properly on my return. Thanks…