Is it ethical for chief executives and senior management of a company to accept fat bonuses if they are underdelivering? Should American Airlines be embarrassed for bonusing their management even though they seem to have missed their targets?
American Airlines CEO Doug Parker clearly stated in their investor date in September 2017, that the airline would never lose money again. He argued that they would always earn in the range of $3 billion to $7 billion per year.
According to Gary from View from the Wing, they barely hit this target in 2017 and they missed it in 2018.
Parker explained that executive bonuses were determined by their ability to hit these profit figures, earning partial bonuses at $3 billion, and more at the $5 billion and $7 billion levels. So what happened to executive bonuses when the airline failed to meet this goal for 2018? Executives received bonuses anyway.
Should American Airlines be embarrassed? Possibly, but this kind of executive bonusing is quite common in our capitalist world, sometimes regardless of executive results. In other words, American Airlines are not alone.
When he was asked about this on the Thursday’s earnings call, CEO Parker said: “In 2018, you’re right on a reported basis we were slightly below $3 billion on a pre-tax level but this calculation is made prior to the payments themselves of course and prior to profit sharing. So what you’ll see in the proxy is that while it was reported numbers below $3 billion in terms of the plan calculation it was slightly above $3 billion. So the team got 51% of their target bonus in 2018.”
Parker argues that it’s necessary to pay bonuses to retain top executives. These top executives may leave if they are not compensated for NOT hitting their targets. Conversely, one could argue that if these underperforming executives left, the airline could bring in new executives who might actually hit the targets?
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