How American Airlines’ CEO Earned $31.4 Million While The Company Struggled sent out its annual meeting notice and proxy statement this week. The item that’s getting most of the attention is how much CEO Robert Isom makes $31.4 million although that headline number is somewhat misleading.
There’s no question that Isom is well-compensated compared to the airline industry as a whole (and American financially underperforms) and it’s especially controversial among employees when flight attendants haven’t seen a raise since 2019 while first and second-year Boston-based flight attendants qualify for food stamps.But there’s a lot more in here that matters: Re-election of the Board of Directors; ratification of KPMG as their auditor; non-binding vote on executive pay; allow amendments to bylaws and certificate of incorporation by majority vote; and a vote on a proposal for third party audit of the airline’s ESG goals.What American Airlines Top Executives Are Paid
Here’s American’s 2023 compensation to named executives. This compensation is set by the board, but shareholders get an advisory (non-binding) vote – an opportunity to say whether they think it’s awesome or off base.American’s officers don’t just receive salary, bonus, and traditional benefits like health and dental. They and their families receive free travel, lounge access and AAdvantage status and they get travel passes to give away as well – with the airline picking up their tax liability for it.American Sets Its Targets To Reward Executives Too Low
At the airline’s Media and Investor Day in 2017, then-CEO Doug Parker famously declared that the airline would ‘never lose money again.’ His presentation described the airline as being like an annuity. They were, effectively, on autopilot to earn $3 billion to $7 billion per year and would average $5 billion annually into the future. There’s been 20% inflation since then – just saying even should mean $6 billion!
Yet Isom’s compensation package describes $2.5 billion as the airline’s target, with $4 billion net profit as a home run – earning him the greatest possible bonus. As George W. Bush once said the soft bigotry of low expectations.American’s Board Of Directors Doesn’t Hold Executives Accountable
American Airlines board members receive Directors receive $100,000, plus additional compensation for serving on committees, plus $150,000 in stock.
They also receive complimentary travel for themselves and family members; passes to give out; and ConciergeKey status – and the company covers their tax liability for it. Directors earn lifetime flight benefits based on length of service.
Their job is to set the vision for the company, approve big decisions, and hold executives accountable.He shared that at the time American brought former Northwest Airlines CEO Doug Steenland onto its board. Steenland had been Robert Isom’s boss, and so presumably was there to be an ally as Isom prepared to take the reins. Steenland serves on American’s compensation committee.
This is a board that has stuck by management as they’ve alienated shareholders, employees and customers.
American has made bad investments in other airlines like China Southern (which they wrote down) and Gol (which went into bankruptcy).
They lost major partnerships (LATAM to Delta). They lost their major play in New York (to an adverse anti-trust ruling).
The carrier no longer talks about taking care of employees so employees take care of customers in order to earn a revenue premium. Instead, the schedule is the product.
CEO Isom’s mantra has been that reliability is what will make the airline perform, failing to understand that it’s a baseline – it isn’t enough. American has become far more reliable, but not more profitable. Expenses are too high to earn money without a revenue premium.
And failing strategically to secure its position in the biggest spend markets in the country (Northeast and Bay Area/Pacific Northwest), they admitted at Investor Day that they’ve fallen behind both Delta and United in co-brand credit card charge volume when half a dozen years ago they were number one.
The board sets the vision and direction for the business, and this board simply deferred to Doug Parker who led them down an unprofitable path. As CEO of US Airways he cut short American’s bankruptcy process (leaving it less competitive than peers), overpaid for it in order to become CEO of the world’s largest airline, and left it with unprecedented debt, higher costs, and less of an ability to generate revenue from its assets than peers. In other words, the board didn’t do its job.Does Robert Isom Deserve This Pay?
CEOs of large public companies are well paid. Many CEOs are paid a lot more. Airline CEOs, which tend not to be prized by the market, aren’t among the highest paid in their group.
It’s difficult to assess how much a given CEO is worth. In general, they capture a small amount of the overall value they create. The best ones are worth a tremendous amount to shareholders relative to the median person that might fill the role. At the best companies well-compensated CEOs are probably underpaid.
Robert Isom was named the ‘world’s best airline CEO’ last year so I guess he’s worth quite a lot? Of course that list placed the CEO of China Southern in the top 10 – and American literally wrote down the value of that investment. It also misspelled the name of JetBlue’s CEO and the name of Dubai-based Emirates.
Some of reported compensation is a function of ‘back pay’ that the board feels they owe Isom because he didn’t get raises during the pandemic.
Robert Isom, Vasu Raja, as well as the airline’s CFO and Chief Legal Officer were promoted at a time when the airline was under restrictions as to how much they could compensate their officers. These were contained in the CARES Act, because it would be unseemly for the government to ultimately give American approximately $10 billion and have it go out to executives. But now that those time-based restrictions have lifted, the airline justifies some of their compensation on the basis of not having been able to give it earlier. That feels awkward.
Some of the reported compensation is, effectively, retro pay which is what makes the amount so large and appears larger than what peers receive. The stock compensation is also large because he owned less of American than other CEOs – who have been in place longer! – own of their airlines.
His salary was “set at a level $1.7 million below the last-reported annual target compensation of the CEO of Delta.” Delta’s CEO should be making a lot more than American’s CEO, though, given the relative performance of their businesses.
Robert Isom didn’t really earn $31 million in 2023. He was given a one-time payout to account for not having received a raise while the airline couldn’t do so because of the $10 billion in taxpayer money it received. He also received an unusually large stock grant aimed at bringing him closer to peer CEOs in ownership stake in the airline.
But he probably shouldn’t be paid as much as other CEOs who have performed better. He shouldn’t (yet) own as much of the airline. And the airline has lowered the bar for what is bonusable. Since this is a board that doesn’t hold its executives accountable, this shouldn’t be surprising.