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June 8, 2007

After 20 months of restructuring Northwest Airlines has come out of bankruptcy and began to trade on the NYSE in late May 2007. Northwest's CEO Doug Steenland exited the bankruptcy with a big pay package. On top of Steenland's salary, reported at $516,384 dollars last year, he will get a total compensation package of more than $26.6 million in stock. That's $5.8 million in stock options and $20.8 million worth of restricted stocks that will vest over the next four years. Northwest workers bore the brunt of the restructuring — after a $1.4 billion a year cut in labor expenses — pilots and flight attendant wages were cut by between 20 and 40 percent.


Northwest's fiscal distress isn't unusual in the post 9/11 airline industry. And indeed, neither cutting labor costs during restructuring nor rewarding CEOs for bringing businesses out of bankruptcy are uncommon strategies. When USAir emerged from bankruptcy in 2005, CEO Doug Parker was awarded an almost $6 million package — employees got pay cuts of up to 53 percent. USAir's pilots lost their pensions completely. But when Delta Air Lines emerged from Bankruptcy in April of this year, CEO Gerald Grinstein actually turned down 10 million dollars in stock awards and reduced his pay to $338,000. Delta employees had taken cuts in pay and benefits of up to 40 percent.

United Airlines employees have taken their discontent with the disparity between their pay and their CEO's to the company's shareholders — picketing the annual meeting in May 2007. The union leaders protested that while their workers were still being paid the lower wages agreed upon in bankruptcy, United Chairman and CEO Glenn Tilton had negotiated a new contact and even larger pay package reportedly worth $39.7 million. According to THE NIGHTLY BUSINESS REPORT, "during [its] three-year reorganization, the carrier slashed thousands of jobs, scrapped pensions and cut wages up to 50 percent for its hourly workers. The wage cuts United negotiated with its unions last another three years."

A June 2, 2007 interview with Northwest's Douglas Steenland from THE NEW YORK TIMES suggests some of the questions stockholders and workers have for high-paid CEOs:

Q. Given how angry workers across the airline industry are about chief executive pay packages, why did you take such a big one?
A. The compensation process is not one I play a role in. The decisions were made by the Northwest board of directors, acting completely independently of management.
Q. But you could have insisted on less, just as you took reduced pay during the bankruptcy, right?
A. If you look at things on a relative basis, in 2006 compared to the other network C.E.O.'s, I was fifth out of six. Among Fortune 500 C.E.O.'s, I'm in the lower 50 percent.

Figures show that Steenland's salary is well within the norm.


The year began with President George W. Bush voicing concern over executive compensation. In his annual State of the Economy given on Wall Street on January 31, 2007, the President warned company boards that they needed to "pay attention to the executive compensation packages that you approve" and tie pay to performance.

Legislation to give shareholders more oversight of executive pay packages was introduced into the House this session by Barney Frank. The bill, H.R. 1257, the "Shareholder Vote on Executive Compensation Act" is modeled on measures already in effect in the U.K. Although the bill wouldn't set pay limits, it would make sure that shareholders have a voice in approving company executive pay practices.

But the White House isn't in favor of this legislation, stating that it "does not believe that Congress should mandate the process by which executive compensation is approved." The White House and other critics say that workers and shareholders should give the Securities and Exchange Commission regulations that went into effect in January, 2007 to show results before turning to legislation. The SEC rules, passed in July 2006, require companies to show an executive's total compensation, including all stock options, retirement plans and other perks. Companies are also required to construct and submit a narrative justifying the pay package. But these new rules do not mandate shareholder participation.


It's not just airline industry workers who are concerned with executive pay — a 2006 Blooomberg/L.A. TIMES poll found that 81 percent of Americans thought executives were overpaid. The numbers might have mellowed some from the highs of the late 90s and 2000 — when the average CEO salary was 525 times that of an average worker in the same industry — but they are still high, and highest of all for American companies. (see chart) According to the Corporate Library, the median increase in CEO compensation for 2006 was 9.29 percent — more than double the rate of pay increase for white-collar workers.

New transparency rules like those put in place by the SEC, and public outcry may have had an effect already on some boards. When the CEO of Home Depot Bob Nardelli left the company among complaints of falling stock prices with a $210 million severance package, many expressed outrage. His successor will only get $8.9 million a year compared to Nardelli's $24 million.

Figures from the Institute for Policy Studies.
Figures for CEOs of 350 leading U.S. corporations.

References and Reading:
More on the Airline Industry

Airline Industry Recent Trend Update (2006)
Report from the MIT Global Industry Study group and Professor R. John Hansman. (PDF)

"Airline Labor Pains," THE NIGHTLY BUSINESS REPORT from May 10, 2007 on the United Airlines shareholder meetings.

Air Transport Association
The Air Transport Association of America, Inc. (ATA) is the nationís oldest and largest airline trade association. Its Web site contains market analysis and issue briefs on matters of concern to the airline industry.

Northwest Airlines
Northwest presents information for consumers and shareholders about the company's financial status on its Web site.

"Ready to Fly Again," Jeff Baily, THE NEW YORK TIMES, June 2, 2007
A Q and A with Northwest chief executive Douglas M. Steenland.

More on Shareholder Legislation

"Democrats Seek Shareholder Voting on Executive Pay," Stephen Labaton, THE NEW YORK TIMES, April 19, 2007.

The Shareholder Vote on Executive Compensation Act

More on CEO Pay

"Executive Excess," Annual report from the Institute for Policy Studies and United for a Fair Economy. (PDF)

"Golden Handshakes," THE ECONOMIST, January 4, 2007
ECONOMIST article on the ratio of CEO to worker pay and efforts at shareholder reform.

"Nothing succeeds like excess," FINANCIAL TIMES, April 10, 2007
Column from THE FINANCIAL TIMES on a recent study of the pay of members of the Business Roundtable.

"Transparency exposes CEO to gaze of green-eyed investors," Richard Beales, FINANCIAL TIMES, April 28, 2007
Assessment from the FINANCIAL TIMES on the salaries of CEOs to hedge fund managers.

"Why Has C.E.O. Pay Increased So Much?,"
A blog frequented by economists discusses a 2006 study by economists Xavier Gabaix of the Massachusetts Institute of Technology and Augustin Landier of the Stern School of Business at New York University which suggested that the higher salaries for chief executives can largely be explained by increases in the value of the stock market. "Viewed as a whole, these salaries are a result of competitive pressures rather than the exploitation of shareholders."

Additional sources:

Bush Takes Aim At Huge CEO Pay President Touts Good Economic News While Acknowledging Anger Over Executive Salaries, CBS, Jan 31, 2007; The Corporate Library's "Preliminary CEO Pay Survey," Paul Hodgson, April 2007.

Published June 7, 2007

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