Setting CEO pay

Posted: Apr 24, 2003 12:00 AM

WASHINGTON -- Sen. John McCain's original proposal was straightforward. With taxpayers bailing out the nation's airlines, he called on the federal government to prohibit pay increases for the industry's executives. Nobody should know better than McCain, however, that Congress tries to turn all legislation into pork. Sure enough, senior senators made certain that their pet airlines were exempted from the compensation restriction.

Indeed, lawmakers are so brazen that what they once dared only behind closed doors is now perpetrated over national television. On April 11, on C-SPAN, three powerful Senate appropriators exempted favored airlines from the restrictions. For all the bluster about cracking down on corporate greed, only 12 airline executives are affected by the one-year moratorium on higher pay. Many others enjoy massive increases in compensation that result in seven-figure salaries.

The broader question is what in the world Congress is doing with any kind of wage controls at the executive level. With most U.S. airlines in desperate condition following the Sept. 11 terrorist attacks, carriers were trying to prevent a brain drain of valued executives departing for greener pastures. That is a subtlety politicians in Washington are ill equipped to handle.

McCain's ire was aroused late in March when it was revealed that Delta Air Lines CEO Leo Mullin, fighting hard for the new federal bailout, had his compensation boosted to $12.9 million at the same time as the company was losing $1.3 billion. The demand to cap executive pay was irresistible.

Since 70 airlines will share in the $2.3 billion of new federal aid (usually, but incorrectly, listed at $3.1 billion), the early presumption was that the McCain limitation would apply to all executives. But things don't work that way on Capitol Hill. The slicing down began at once. Purely domestic airlines were exempted by the House Appropriations Committee in what was interpreted as a friendly gesture toward Southwest Airlines and its influential CEO, Herbert D. Kelleher.

The nationally televised Senate-House conference of April 11 continued limiting the cap. Senate Democratic Whip Harry Reid of Nevada wondered whether America West could be exempted. America West CEO W. Douglas Parker's $550,000 basic income has swollen to $2,537,650 total compensation. (Reid was to be the honored guest April 17 at the opening of America West's new reservation center in Reno but did not appear for unexplained reasons.)

Reid's wishes were granted. Senate Appropriations Chairman Ted Stevens of Alaska next succeeded in exempting Alaska Airlines. Finally, Sen. Daniel Inouye of Hawaii, second ranking Democrat on the Appropriations Committee, threw out Hawaiian and Aloha.

To the uninitiated, limiting the pay cap to transpacific and transatlantic carriers resulted from impromptu interaction between three Senate old bulls. To savvy lobbyists, it was all orchestrated in advance.

Only the Big Six airlines -- American, United, Delta, U.S. Airways, Northwest and Continental -- now were covered, and only the top five executives from each company. But this was soon trimmed to the top two for a grand total of 12 covered executives.

That exempts Delta chief financial officer M. Michele Burns, whose base salary of $560,000 has ballooned to $3,062,910. Also exempted is Jeff A. Smisek, Continental executive vice president, who has gone from $540,000 to $2,987,860. And the exempted Southwest's Kelleher surpassed Delta's Mullin when he realized $13,943,075 last year in exercising stock options. Highly profitable Southwest, incidentally, shares significantly in the bailout.

In fact, Mullin, whose pay raise launched the congressional exercise in dictating compensation, was not able to bank anything like the much advertised $12.9 million. He actually received $2,196,188, with the additional $10 million estimated to be realized over the next decade.

Congressional passion over executive pay was surpassed by American Airlines labor unions, which protested bonuses granted to executives. American CEO Donald J. Carty (whose bonus was $1.1 million) prostrated himself Monday in canceling bonuses, abjectly apologizing to employees and union leaders, and promising to be "a better person." The bonuses, approved by an independent board of directors, were an attempt to stem the flow of 14 officers plus many senior managers from American to more lucrative industries over the past 18 months. That's the way the capitalist system works, when it is free from quirky congressional intervention.