Protection for management not for pilots
Pinched Delta gives bonuses to execs last year
By RUSSELL GRANTHAM
Atlanta Journal-Constitution Staff Writer
Executives at Delta Air Lines got cash bonuses totaling $17.3 million last year, as the company posted huge losses, slashed thousands of jobs and sought millions of dollars in federal aid.
Delta used another $25.5 million in cash to create special funds guaranteeing certain executives' pensions in the event of a bankruptcy, according to a filing the Atlanta-based airline made Tuesday with the Securities and Exchange Commission.
The filing shows that Chairman and Chief Executive Leo Mullin got the biggest bonus, $1.4 million, in addition to his full salary of $795,000, for a total of $2.2 million in cash pay. It was the highest amount Mullin has received in his 5 1/2 years at Delta.
Delta had given no executive bonuses in 2001, but last year retooled its bonus formula to make them possible despite $1.3 billion in losses.
Company documents show executives were aware the pension changes could create public relations problems with various groups, ranging from union pilots to politicians, but decided to make them anyway.
In its SEC filing, Delta said the bonuses and pension moves are justified by the need to retain executive talent amid industry turmoil.
BY THE NUMBERS
$1.3 billion: Delta's net losses
16,000: Jobs cut
58.6%: Drop in share price
$4.8 million: Bonuses paid to top five executives
$12.5 million: Bonuses paid to 55 second-tier executives
Note: 2002 figures
Source: Company filings, internal documents, staff research
The filing shows Delta's No. 2 executive, President and Chief Operating Officer Fred Reid, got a $1.2 million bonus in addition to his full salary of $700,000. Three other top executives got six-figure bonuses.
The airline also doled out $12.5 million in bonuses to 55 second-echelon executives. Individual amounts ranged from $385,000 to $126,000, according to company documents that were not part of the SEC filing.
The moves stand in stark contrast to 2001, when Delta's top executives skipped bonuses "in recognition of the sacrifices being borne by Delta's work force," as stated in that year's SEC filing.
At the time, Delta was cutting 10,000 jobs after the Sept. 11, 2001, terrorist attacks caused passenger demand to plummet. It later announced up to 8,000 more job cuts.
Concessions sought
Disclosure of the bonuses and pension changes comes at a sensitive time. Delta recently approached its pilots union about contract concessions. Karen Miller, a spokeswoman for the union, said the disclosures in Tuesday's filing will be considered.
"Both of these issues are things that we will be evaluating as part of our financial analysis of Delta" before deciding to reopen labor contract negotiations, she said.
"I can't speak for how all pilots . . . will react to this if management is asking for some major wage reductions," Miller said.
Delta and other major airlines are seeking a new federal aid package, citing the damage to the industry's faltering recovery effort from the war in Iraq. Mullin has been a point man for the industry in lobbying for federal relief from security-related costs that airlines contend have been unfairly thrust upon them.
Delta is apparently the first major airline to make the required SEC filing that includes executive pay for 2002.
Traditionally, executive bonuses at Delta were based largely on profits and operational yardsticks.
Last year, company documents show, the board of directors changed the rules to award bonuses based on so-called "free cash flow" -- the profit the airline generates before interest, taxes, depreciation and aircraft rent.
The documents indicate executives will be eligible for further retention bonuses of up to 300 percent of their salary by meeting the targets and staying with Delta through 2004.
In addition to his 2002 bonus, Mullin last year got restricted stock and stock options pushing his total compensation to almost $13 million, based on assumptions about future stock performance, according to the SEC filing. Some of those awards are part of a new five-year contract Mullin negotiated.
Both Mullin and Reid recently said they will take 10 percent salary cuts this year, as of March 1.
Delta management in early 2002 asked directors on the board's compensation committee to create individual trusts for 33 executives that would isolate much of their pension benefits from creditors in case Delta had to be restructured in bankruptcy court.
The move required Delta to pay out $25.5 million to fund the trusts and cover additional tax liabilities triggered by the action.
Like most large corporations, Delta previously covered the majority of its retired executives' pension benefits on a pay-as-you-go basis out of operating funds.
Companies in financial distress may use such so-called "secular trusts" to protect executive pensions from creditors if the company lands in bankruptcy court, pension consultants John Dempsey and Michael Siebenhaar wrote in a recent article for the American Compensation Association.
In Delta's SEC filing, the company's directors said the terrorist attacks "demonstrated that unprecedented actions outside Delta's control could result in the complete loss of" a large portion of executives' pensions. That "creates a significant concern for retention of management personnel," the directors added.
But executives also worried how the politicians, the pilots, the press and others would react to Delta's moves to guarantee its executives' pensions, according to a "risks" analysis in company documents obtained by The Atlanta Journal-Constitution.
Wary of Washington
Washington, which had enacted a $10 billion bailout package after the Sept. 11 attacks, "might react negatively in view of the employee reductions in force," Delta's analysis stated.
Pilots, who have similar pension plans that might be wiped out by a bankruptcy, "will be envious but not vilify the action," the company concluded.
Delta managers seemed less concerned about the press, noting that "little information is provided" in the company's filings to the SEC.
The report stated Delta will say "the action simply provides the same level of retirement benefit as all its other employees, except pilots."
The federal government guarantees worker pensions up to a certain amount in the event of corporate failures. Typically the amount is about $40,000.
Mullin's cash pay was nearly triple what he got in 2001. He took a pay cut immediately after the terrorist attack and received a salary of $596,250 with no bonus.
He had received more than $2.1 million in 2000 and $1.7 million in 1999.
