Excessive Executive BonusesOrganizations are imposing wage cuts, downsizing, and restructuring in order for the organizations to remain competitive in the marketplace. Organizations have gone to the extent of declaring bankruptcy. Employees are being laid off, and unions and their members are making concessions. The hardworking employees who burden the load of the daily responsibilities to keep the organizations running are the ones who are ultimately suffering from the organizational restructuring. Therefore, is it ethical for executives to receive excessive bonuses, payouts, perks, or "golden parachutes" while organizations and employees are struggling to survive?This paper will discuss excessive executive bonuses and apply the six ethical decision making steps in order to resolve the issue. The six ethical decision making steps that will be discussed in this paper are issue clarification, stakeholder analysis, values identification, issue resolution, addressing objections, and resolution implementation.
Ethical Decision Making StepsIssue ClarificationExcessive executive bonuses have become an issue over the past decades.
Research in 2006 by the Economic Research Institute and CarreerJournal.com indicated that the average annual cash bonuses increased by 58.8% and total cash compensation increased by 31.21% (Amble, 2006). In January 2006 American Airlines proposed $70,000,000 in bonuses for over 1,000 executives (USA Today, 2006). In January 2006, chairman and chief executive Garard Arpey was the only executive who did not take part in the bonus program. United Airlines has had similar situations as American Airlines. United Airlines proposed to give eight top executives a bonus of $45 million in stock and reserved 13.6 million shares for 400 executives; CEO Glenn Tilton would receive $15 million in stock and receive $605,625 in compensation annually in addition to an annual bonus (Labor Notes, 2005 - 2008). US Airways gave out $6 million in bonuses for 500 management positions after declaring bankruptcy in 2002 (Ward, 2002).
Corporations have come to rely on executive compensation packages to attract and retain a CEO or top executive. Compensation packages usually consist of retirement benefits, incentive plans, and gains from stock options, while including perks such as use of the corporate jet, a chauffeured limousine, health insurance, and membership to elite country clubs. Perks that often are retained after employment with the organization has ended. Payouts or "golden parachutes" are even included in the packages if organizations release some executives, as with Steven J. Ross, co-chairman of Time Warner, Inc. If dismissed, he could receive $200 million (Fowler, 1989). These packages are given to executives without consideration for the employees and the concessions that are made by them to keep the organizations in operation.
Stakeholder AnalysisIn May 2007, employees from American Airlines were distressed that executives were given stock-based bonuses amounting to millions of dollars after recent years of substantial pay cuts for employees. Union leaders protested because in 2003, members of American Airlines' three unions barely approved annual pay cuts of $1.6 billion and other concessions when American Airlines was on the verge of bankruptcy (USA Today, 2006). Employees were disappointed as they had yet to receive any money from stock options which were received as part of the deal. Employees believed that executives are more focused on raising AMR Corporation, the parent company of American Airlines, stock price rather than keeping the company growing.
Four billion dollars in pay and benefit concessions taken from United Airlines workers left the employees disappointed with the proposals (Labor Notes, n.d.). Distrust between Communications Workers of America (CWA) and International Association of Machinists (IAM) members occurred during negotiations of concessions. According to Ward (2002), mechanics within the IAM began to mistrust both the organization and the IAM itself because of:1.Anger at $6 million in bonuses for management.
2.$1.2 million company payout to the IAM to cover negotiation expenses - considered by some to be a bribe.
3.Significant loss of vacation and sick time.
4.Significant layoffs in the mechanics group.
Employees have agreed to substantial cuts due to the fear of job loss. They believe that cuts in pay and benefits outweigh the risk of losing their jobs.
Values IdentificationMany people believe that executives are paid too much for the services they provide when the executives are not directly involved in the daily operations that make the company run. Other people believe that executives can have a positive effect on the company's performance and in order to attract and retain top executives, high compensation is needed. In some people's opinion, the talent they possess can fuel a company to success. James Dimon, a former CEO from Bank One, cut costs by more than one billion dollars and turned a half billion dollar loss into a $3.5 billion profit in the four years at Bank One.
American Airlines is said to value "the diverse perspectives and innovative ideas of our employees" and "strive to create an environment where each person can fully participate in achieving business and personal success making American a great place to work" (American Airlines, n.d., ÃÂ¶ 2).
In attempting to attract employees, American Airlines offers: excellent benefits, travel privileges, work/life support, and a commitment to employee involvement through employee resource groups, surveys, focus groups, and task forces (American Airlines, n.d., ÃÂ¶ 6). American Airlines has failed to provide the employees with unspoken promises by approving executive bonuses while reducing management and support staff positions.
Issue ResolutionThe only resolutions have been employee layoffs. On July 2, 2008, American Airline employees were notified via internet posting that 900 junior U.S. based Flight Attendants would be laid off effective August 31, 2008 (APFA, 2008). By the end of 2008, American Airlines anticipates cutting approximately 8% or 7,000 employees.
Three reduction programs used by American Airlines include Voluntary Bridge to Retirement, Overage Leaves of Absence, and Partnership Flying. Voluntary Bridge to Retirement has been offered to senior workers who: are not currently on leave of absence, are at least 50 years of age, and have at least 15 years of seniority as of August 31, 2008 (AFPA, 2008). Other provisions of Voluntary Bridge to Retirement include a $15,000 severance payment and specific medical and pass benefits.
American Airlines will also reduce the number of national flights by 12% and international flights by 8% by the end of 2008. Tim Wagner, an American Airline spokesman said, "These are difficult but necessary changes given the unprecedented challenges we face with overcapacity in the industry, skyrocketing fuel prices, and a worsening U.S. economy" (The New York Times, 2008, ÃÂ¶ 10).
At US Airways in September 2002, CEO David Siegel described his restructuring as "labor-friendly." Eight union groups made concessions of $465 million per year by ALPA, Airline Pilots Association, International, and $75.8 million per year by AFA, Association of Flight Attendants (Ward, 2002). On August 11, 2002, two days after passing their agreement with the flight attendants, US Airways filed Chapter 11 bankruptcy. US Airways top executives reported also took a "cut" in pay during the bankruptcy. Vice presidents took a 13.5% pay cut and CEO, David Siegel cut $150,000 from his $750,000 yearly salary.
Addressing ObjectionsJeffrey J. Brundage, American's senior vice president for human resources stated, "While we are still working through the specific impact to employee work groups, both voluntary and involuntary, employee reductions commensurate with the overall system capacity reductions are expected companywide as we reduce the size of the airline" (The New York Times, 2008, ÃÂ¶ 7). He also stated, "It is crucial that we take the appropriate actions to operate a strong and competitive airline for both our employees and customers" (The New York Times, 2008, ÃÂ¶ 8). American Airlines believes that reducing its workforce is the best way for the company to remain competitive in the airline industry. No word has yet to be said of elimination or reduction of executive bonuses.
US Airways issued bonuses of $6 million to 500 management positions that ranged from $7,440 to $156,000 per year. The justification for the bonuses by the organization was to retain the talent necessary to make it through the reorganization. Reorganization brought about by reckless decisions made by management in the first place.
Resolution ImplementationIn May 2007, labor leaders confronted AMR's CEO over management bonuses. The shareholders refused a union resolution to let shareholders vote on executive pay. Employees believe that promises have been broken to share in the gains as American Airlines recovered from losses of previous years.
American Airlines is appearing to be more open to employeecomments and ideas. They are attempting to keep their employees a part of the decision making process compared to other airlines, in order to satisfy the employees and keep them working without the expected benefit of raises and promotions. On the other hand, American Airlines has to take care of its employees by providing them with equal compensation. Many airlines have been asking employees to pass up the possibility of a raise this year in order to avoid layoffs and continue to stay in business. This may simply be because American Airlines is in trouble and they are banding together in order to survive.
Despite public awareness and the media concentration on executive pay and compensation packages, some upper level management have had to take significant pay cuts. But top executives have continued to receive large bonuses.
ConclusionIn life, decisions have to be made every day. Choices can be clear, with an easy right and wrong answer. Sometimes the choices are not so clear and each alternative can be compromising one or more values. Ethics involves moral issues and choices, and influences daily decisions made by individuals and organizations. American Airlines employees have and are continuing to lose their jobs and the executives have yet to give up their perks and bonuses. The amount of employee related costs to AMR will be $70 million (Chicago Tribune, 2008), while the cost of bonuses proposed to executives in January of 2008 was $70 million and bonuses given to executives in 2007 was $160 million in stock. Executive bonuses total $230 million for only two years. Because the organizations do not like to use the term "bonuses" due to bad impressions, they use the term "payouts." It does not matter what term is used, excessive compensation is still given to and taken by executives. If the bonuses were used to offset losses and return into the organization, then the possibilities of downsizing would be minimal. Surely the executives could do without the perks so that the hardworking employees can earn enough money for their livelihood. If this is not unethical, than what is?ReferencesAmble, B. (2006, August 23). Executive bonuses more than double. Management-issues. Retrieved August 25, 2008, from http://www.management-issues.com/2006/8/24/research/executive-bonuses-more-than-double.aspAmerican Airlines. (n.d.). Why choose american. Retrieved August 23, 2008, from http://www.aacareers.com/us/frame_index.htm?why_aa.shtmlAPFA. (2008, July). 7.02.08. Retrieved August 23, 2008, from http://www.apfa.org/content/view/1551/585/Chicago Tribune. (2008, July). American airlines to eliminate 900 flight attendant jobs. Retrieved August 24, 2008, from http://www.chicagotribune.com/travel/chi-thu-airlines-layoffs-jul03,0,56659.storyFowler, E. M. (1989, October 17). Careers; executive pay called too high. The New York Times. Retrieved August 25, 2008, from http://query.nytimes.com/gst/fullpage.html?res=950DE2D81331F934A25753C1A96F948260&sec=&spon=Labor Notes. (2005-2008). Protect excessive airline executive bonuses. Retrieved august 24, 2008, from http://labornotes.org/node/180The New York Times. (2008, July). Big job cuts announced at American. Retrieved August 23, 2008, from http://www.nytimes.com/2008/07/03/business/03air.html?_r=1&oref=sloginUSA Today. (2006). American airlines CEO defends executive bonuses. Retrieved August 23. 2008, from http://www.usatoday.com/travel/news/2006-01-19-aa-payouts_x.htmWard, R., (2002, 0ctober). Bankrupt US Airways Gives $6 Million in Bonuses to Management While Taking Billions in Concessions from Workers. Labor Notes. Retrieved August 23, 2008, from http://labornotes.org