As Carriers Sought Help, Top Tier's Pay Soared

By Keith L. Alexander

Washington Post Staff Writer

Saturday, April 12, 2003; Page E01

For airline employees and investors, 2002 was one of the worst years in history. But for most chief executives of U.S. carriers, it was one of the best.

While the air industry grappled with a steady decline in travel due to the weak economy and the lingering effects of the Sept. 11, 2001, terrorist attacks, airline boards piled on hefty rewards for their senior executives.

Certainly the airlines weren't the only companies bestowing largess on their top executives. Major concerns such as Walt Disney Co. and the Cardinal Health Inc. pharmaceutical company boosted executive pay even as their earnings and share prices tumbled.

But only the nation's airlines have twice sought help from the Bush administration for their financial woes. Yesterday, as congressional negotiators agreed on an aid package worth more than $3 billion to help the airlines with their escalating insurance and security costs, they also agreed to impose a one-year moratorium on salary hikes for the top two executives of each of the major carriers. The aid package follows a $15 billion bailout Congress approved immediately after the Sept. 11 terrorist attacks.

All five of the largest airlines that reported historic losses last year -- United, Delta Air Lines, Northwest, Continental and US Airways -- increased their compensation packages for their chief executives from the previous year. Only the chief executive of Southwest Airlines, James Parker, took a pay cut last year. Parker's salary and bonuses at Southwest, the only top 10 airline to post a profit last year, were reduced by 13.6 percent to $536,060. That figure excludes the $344,000 he gained from the sale of more than 31,000 shares of Southwest stock.

American and America West airlines have not yet filed their year-end reports with the Securities and Exchange Commission.

Leo F. Mullin, Delta's chairman and chief executive, received $13 million last year, up from about $2.2 million in 2001. Delta spokeswoman Catherine Stengel said the increase was so pronounced partly because Mullin took a 25 percent pay cut in 2001 after the terrorist attacks. In addition, Mullin's 2002 package included a bonus that he received for signing a new seven-year contract with the Atlanta-based airline.

Gordon M. Bethune, Continental's chief executive, earned $14 million last year, compared with $4.2 million in 2001. Bethune also gave up a portion of his pay and bonuses after the terrorist attacks.

US Airways paid its chief executive, David N. Siegel, $1.4 million in salary and bonuses last year, nearly twice what his predecessor, Rakesh Gangwal, received. Siegel, who was hired in March 2002, led US Airways through its seven-month bankruptcy reorganization.

The airlines' hefty compensation for senior management has come under intense criticism from some lawmakers, among them Sen. John McCain (R-Ariz.), who called the packages "insulting." McCain included in the Senate's latest aid package a provision that would cap senior executives' pay and bonuses.

While executives were earning more, they were slashing jobs, salaries and pensions, reducing flights and eliminating flight amenities such as meals and blankets. US Airways, for instance, shut down its pilots pension plan and replaced it with one that provided benefits at about half the original level. United has laid off 9,000 workers and Delta has cut 314 flights.

"Airline executives have come into the airlines and raided the companies' cash and its financial structures for their own personal gain over the years, which has partly caused the airline industry to get in the position it's in today," said Roy Freundlich, spokesman for the US Airways pilots union.

Freundlich said airline executives have "no commitment to their employees or their airlines. The only things airline executives have proven is that they're committed to their own incomes."

The airlines contend that they must offer lucrative pay packages to retain their best executives and preserve their competitiveness. US Airways' Siegel said recently that "if you don't pay appropriately, you're not going to get the good managers" and that, ultimately, hiring "bad managers was more expensive."

Compensation expert Graef Crystal said Siegel's argument was common, whether business is profitable or unprofitable. For an industry that has lost more than $18 billion in past two years, Crystal said it may be time to "let some of these so-called good executives go."

By granting such large compensation packages, Crystal said, the airlines wind up distancing their executives from rank-and-file employees -- and that could prove costly when the airlines want employees to agree to wage cuts.

"Instead of leading by example, they instead seem to lead by the Marie Antoinette school of 'let them eat cake,' " he said.

Phillip Baggaley, an airline equity analyst at Standard & Poor's, said the pricey compensation packages ultimately could affect the airlines' credit ratings. The high pay could "complicate" labor negotiations and thereby hinder the cost reductions needed to enhance the airlines' position among Wall Street investors and lenders.

In the past few weeks, three chief executives -- Delta's Mullin, United's Glenn F. Tilton and Americana's Donald J. Carty -- decided it give back a portion of their earnings. While the gestures could be seen as a way to appease lawmakers, compensation experts say the moves were also aimed at mollifying employees, especially as the airlines are seeking hefty wage and benefit concessions from workers.

Mullin agreed to a 25 percent cut in salary next year, which reduces his total compensation by about $9.1 million. Carty accepted a 33 percent pay cut. Tilton said he would reduce his pay by 14 percent in addition to the 11 percent reduction he took in December. However, he kept his $3 million signing bonus.

Rajesh K. Aggarwal, an economics and finance professor at Tufts School of Business, said that executive pay should decline along with airline costs but often it doesn't. That's because directors reward executives for meeting cost-cutting projections aimed at making the company competitive long-term.

"Top executive compensation is a cost like any other cost. But often bonuses are based on certain targets that management is measured on including reducing head count and other costs," Aggarwal said.

Researcher Richard Drezen contributed to this report.

© 2003 The Washington Post Company