Source: Crain's Chicago Business
Author: Julie Johnsson

Brass Holds Tight To Bonus Program As Unions Face Cuts

Frantic cost-cutting at United Airlines skipped over a juicy target: a $100-million bonus program that management refuses to jettison.

For those employees who survive layoffs, bonuses could be even more generous in 2005, United executives told employees earlier this month.

Union leaders representing mechanics and flight attendants at the nation's second-largest airline suggested in contract talks early this month that the "Success Sharing" bonuses be eliminated to help the company cut another $725 million in payroll costs. Management negotiators wouldn't hear of it, the unions say.

Under the program, top executives are eligible for bonuses of up to 40% of their salaries, compared with 5% for rank-and-file workers. United won't disclose bonuses paid to individual executives; CEO Glenn Tilton's $712,500 salary in 2004 would yield a $285,000 bonus at the 40% level. He agreed to a 15% salary cut for 2005.

United paid about $100 million to all employees last year under the program, which awards quarterly bonuses based on the airline's success in hitting on-time performance and customer-satisfaction goals.

Unions facing the loss of pensions and cuts in health benefits as United struggles to emerge from bankruptcy were willing to sacrifice the bonuses. When management resisted, the unions agreed to take smaller bonuses as a trade-off for protecting other benefits.

"You're staring down the barrel of $725 million in pay cuts," says a spokeswoman for the Assn. of Flight Attendants. "Why wouldn't we target that area as a concession and save another area that's much more vital, such as health care?"

SEPARATE SCALE

The incentive program, rolled out last year, is designed to give the airline's 60,700 workers, from Mr. Tilton down, a financial reward for improving operations. It replaced pre-bankruptcy incentives, based on similar criteria, that were paid only to management.

"This is the first time that everyone in the entire company has been on a similar bonus program," says a spokesman for Elk Grove Township-based United. "In a highly competitive environment, we need to deliver performance to our customers."

United's perks are more generous and employ less-stringent targets than a similar plan launched last year by American Airlines. Unlike its rival, United also pays bonuses on a separate scale for managers, a structure that rankles some workers.

"Most members see what upper management gets and feel it is not a real success-sharing," says a spokesman for the Aircraft Mechanics Fraternal Assn. Local 4, which represents United mechanics at O'Hare International Airport. "It is just an upper-management bonus program."

The United spokesman says that just 1% of management — "the very highest levels" — qualifies for the 40% bonus. Most managers are eligible for payments of 5% to 10%.

Unlike other employees, bonuses paid to Mr. Tilton and all other managers are also determined by how they perform their jobs. "It allows for a greater reward for high performers and a lower or no reward for low performers," says the spokesman.

A MORE-GENEROUS 2005?

United paid out $78 million through Sept. 30 and has said it will pay $22.1 million for the fourth quarter, when its on-time performance slipped. That $100-million payout could double in 2005. Last year United had in place another incentive program based on reaching a financial target for the year; it didn't meet the target. This year United will base that incentive plan instead on quarterly measures of its operating earnings and its cost per average seat-mile, excluding fuel costs.

While United relies heavily on internal measures, American Airlines pays all employees up to $100 per month extra, based on the airline's national ranking in on-time and customer satisfaction surveys tallied by outside entities. It pays an additional 2% to 20% of earnings if the airline posts a 5% or greater annual operating profit margin — a result it's certain to miss for 2004.

While American won't reveal its total payout, a spokesman says, "It's not in their (United's) neighborhood."

The United spokesman says the bonuses will more than pay for themselves if United hits its targets, and denies the perks are excessive, or the targets easy: "That's your opinion."