The Baumert Report

The Baumert Report January 5, 2007

According to calculated estimates from other sources, it now seems AMR's top four executives will be awarded very large bonuses this year worth a possible combined value of more than $16 million. AMR CEO Gerard Arpey's award alone could amount to as much as $7 million. The potential bonuses are so obscene and offensive they could qualify as a Rule 32 violation.

Yet, AMR's senior executives are simply engaging in their newly-minted practice of rewarding themselves for their employees concessions, sacrifices and increased productivity - while their employees get, well, nothing.

The size of the senior executives' bonuses, as well as the opportunity to sell their stock at a tremendous profit, is based on AMR's stock price performance. However, where would the stock price be without the labor unions at AMR taking on bankruptcy-type contracts without ever entering bankruptcy? Where would the stock price be without the more than $2 billion in annual savings in labor costs, courtesy of union members? (Yes, the company's "official" number is $1.8 billion, but talk about a lowball estimate.)

The fact is, the sacrifices of employees are mainly responsible for AMR's stock price performance, and thus, the egregious bonuses for management.

Though they didn't do so last year and no one expects they will do so this year, AMR senior executives should decline the bonuses for the sake of desolated morale, basic fairness and in order to attempt to restore, somewhat, their completely blown credibility with employees.

A CEO and his senior executives giving up their bonuses is not without precedent. When JP Morgan Chase CEO Jamie Dimon was at the helm of Bank One, he and his senior executives refused the bonuses they were to be awarded for the company's year 2000 performance. He simply felt Bank One did not perform as well as it should have performed.

In Bank One's 2000 annual report, Dimon explained, "Now we [the senior executives] will be the first to sacrifice, as is appropriate. Leadership is an honor, a privilege and a responsibility to do the right thing and set the right example." This CEO actually meant what he said.

Perhaps AMR executives should follow his example.

Lagniappe: Just in time for holiday shopping, on November 14, Gerard Arpey sold 40,440 shares of his stock at a price range of $30.41 - $30.57.

Steven Baumert

The author is a Registered Investment Adviser with Baumert Capital Advisors, an Allen, Texas-based investment consulting firm. He does not own the securities of AMR/American Airlines. His family owns shares in JP Morgan Chase. The preceding should not be considered investment advice and is for informational purposes only. The author has been an employee of American Airlines since 1988.