Stock-based compensation awards at AMR: Let’s talk timing

From a public relations standpoint, the timing couldn’t be worse. AMR Corp’s board of directors boosted the stock-based compensation of its five most senior executives just one day before the company announced major capacity cuts, job losses, potential facility closures and that controversial $15 charge for the first checked bag.

 

A 22 May filing to the US Securities & Exchange Commission (SEC) details the combination of stock appreciation rights, deferred share awards and performance shares earmarked for chief executive Gerard Arpey; CFO Thomas Horton; EVP-marketing Dan Garton; EVP-operations Robert Reding and SVP & general counsel Gary Kennedy.

 

The at-risk awards were agreed on Tuesday, May 20th. Strike price on the shares options were based on AMR’s closing price for that day. On Wednesday, management revealed its capacity-reduction plan, citing record high fuel prices, growing economic concerns and a difficult competitive environment.

 

Sure, the filing is procedural. “Every year our [board] compensation committee has to approve the stock awards for that particular year,” notes an AMR spokesman. And yes, with AMR’s share price worth over three times less than in 2007, the actual value of the compensation appears slightly lower than what was awarded last year.

 

But all of that must be cold comfort to the thousands of workers at American Airlines and American Eagle Airlines, who now face the very real possibility of losing their jobs.

 

The Allied Pilots Association (APA), which represents American’s pilots, is already making known its discontent. It says: “To illustrate the magnitude of this stock-based compensation, Arpey is slated to receive stock appreciation rights for 286,000 shares, 116,000 shares under the deferred share award agreement, 58,000 career performance shares, and 230,000 shares under the performance share plan.

 

“The number of shares awarded to Mr. Arpey under the performance share plan is more than triple the number he received for 2007, with the other four senior executives also receiving much larger numbers of performance shares. Also, Mr. Arpey could ultimately collect up to 175% of the 230,000 performance shares and 58,000 career performance shares he is eligible to receive, depending upon how AMR stock performs.”

 

That final sentence is important, of course. Everything depends on AMR’s stock performance. Nonetheless, even seasoned veterans are crying foul. “While senior management announces a large fleet reduction and capacity cut, they’ve quietly feathered their own nest…several millions more in executive compensation while the line employees are dreading cutbacks and furloughs,” says an American pilot, who does not represent the union.

 

AMR points out, however, that Arpey’s total compensation in recent years has been more than 50% below the median for CEOs at comparable companies. And it makes several other points in an email to me. They are that:

 

n      Gerard’s cash compensation in 2007 included $656,500 in salary and zero in short-term incentive awards (which we consider a cash bonus and which hasn’t been paid since 2001 for the 2000 performance).

n      While it is the board’s intent to bring Gerard’s compensation closer to median, in light of the current financial condition of the industry and the company, the Board decided to keep Gerard’s 2007 salary at the same level that he had in 2006, except for the 1.5% increase in base salary that all AA employees.

n      At risk compensation is an important element of our compensation program, which generally represents more than 75% of the proxy officers’ total compensation.

n      At risk means that it is not guaranteed. The April 16 vesting of the 2005/07 performance share plan is a good example of what we mean by at risk.

n      At an $8.92 share price, individual proxy officer PSP (performance share plan) amounts were 73% to 75% lower than in 2007 and 52% to 56% lower than in 2006.

n      Gerard’s PSP distribution in April was valued at $1.67 million, 75% lower than his 2007 distribution. (received $6.6 million in 2007; $00 in 2006, $130,061 in 2005 and 151,020 in 2004).

n      Some people might forget that Gerard’s PSP payout was ZERO for 2006 because he declined stock awards when he was promoted to CEO in 2003. He received less than $300,000 combined in this category in when his performance share grants vested in 2005 and 2004. Again, this is what we mean by at risk.

n      According to one of our compensation consultants, Hewitt Associates, use of performance shares at Fortune 200 companies has grown from 37% in 2005, to 46% in 2006 and 54% in 2007.

n      In fact, performance shares are becoming a bigger part of the mix of long-term incentive compensation for corporate officers. According to Hewitt, among large US companies, Performance Plans represented 17% of long-term incentive compensation in 2005, 34% in 2006 and 42% in 2007.

 

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2 Responses to Stock-based compensation awards at AMR: Let’s talk timing

  1. Dan Walter May 28, 2008 at 9:42 am #

    Thanks for the well written and researched article.

  2. Sparky May 28, 2008 at 10:27 pm #

    For those of us who are AMR employees, this isn’t the biggest betrayal, just the most recent. We all remember the days when Mr. Arpey first became CEO and the buzz words were “Pull Together-Win Together”…boy were we duped…