Bloomberg news is reporting that American Airlines Group CEO, Doug Parker, has switched to a compensation plan that includes only stock. He will no longer receive a cash salary. According to the article,
“The change, effective immediately, reflects confidence in the growth opportunities at the world’s largest carrier, Parker said in a message to employees Wednesday. Of the stock grants he has been granted, 54 percent is tied to performance and 46 percent will vest over time, according to a corporate filing.”
A high proportion of most CEOs’ pay packages are tied to financial performance through stock grants of various flavors. I believe Doug Parker to be the first airline CEO to give up their cash salary and switch to being paid just in stock.
What Does This Mean?
It means Doug Parker is confident that American Airlines is likely to continue doing well for the foreseeable future. Historically, in the airline industry the foreseeable future would be about a week. I think it’s an interesting move for sure, and it speaks to a paradigm shift in financial thinking at airlines where management now runs the business with a focus beyond meeting next week’s payroll. It also raises the question – what ideas are likely to be experimented with to help ensure that AA’s stock price continues to do well? I continue to believe that American has gotten more right than wrong in the merger with US Airways, and have said so here. Touch these, and we’re going to have a problem!
Not only can he hold onto stock and sell at the long-term capital gains rate, but he’ll avoid FICA taxes as well. I think this much more about reducing his tax burden from ~40% to ~20% than any sort of model introduced by the author.
COMPLETELY AGREE
This is about ripping off the taxpayer in the middle class while appearing to be a good man
Yes Jeremy, thanks for the info! I’m sure he’s pretty confident that the stock market won’t really tank, nor will AA have any major issues for the next 5 years, since travel demand is strong. He will no doubt plan to hold the shares to pay only Long term gains tax.
CPA here, just wanted to clarify, but he’s only partially avoiding ordinary income tax rates and converting this to capital gain treatment. It works like this:
He will soon if he hasn’t already be granted x number of shares of stock which have vesting restrictions (46% time based 54% performance based). Let’s say that he is given 100,000 shares and the value when granted was $50 (today it’s $51.20). The value of the stock at time of grant is $5M.
Let’s assume that the vesting all will occur within 12 months, assuming all performance targets are met and he gets 100%. Let’s also assume that the average stock price on the date of vesting is $75/share. His stock is now worth $7.5M. Ordinarily it’s at this point in time where he is taxed on the income, which IS taxed as ordinary income and subject to FICA. Thus he’d be taxed the full tax rate 39.6% federal + FICA on $7.5M. Assuming he holds the stock for more than one year from the vesting date, any appreciation is long term capital gain. So assume he sells the stock for $10M one year later. $2.5M would be taxed at 20% LTCG rate.
However, he most certainly has made an 83(b) election which allows him to treat the shares as if he owned them at the time of the grant, this causes $5M to be taxed at 39.6% and subject to FICA. If he’s confident in the stock rising, any subsequent gains are taxed at LTCG rate of 20%. On the flip side, if the stock decreases in value and he sells it for a loss of $1M, that loss is a LTCL which can only be used to offset capital gains otherwise only $3,000 per year is able to offset ordinary income. In this case making the election would be disastrous.
So yeah he’s only partially reducing his taxes, by whatever appreciation occurs on the stock from either the grant or vesting date.
@Jeremy,
Thanks for that info!
Without knowing the details this comp structure is nebulous at best.
Will Parker attempt to drive the stock price via short term cost savings to the detriment of long term value?
Does the comp structure vest over 1 yr, 2 yrs, 25 yrs?
How will this plan influence how he invests for the longer term health of the airline?
Is there a provision to adjust or back date the strike price of any options or stock purchase exercises?
Given his hand-picked board I am betting he is not doing this out of charity.
And as earlier posters opined, most of this “compensation” will be taxed as long term cap gains which allow a far lower effective rate.
Sounds like a lame headline grab.
He’ll look like a genius until the stock market goes down the tubes again (which it will, eventually).
Not only can he hold onto stock and sell at the long-term capital gains rate, but he’ll avoid FICA taxes as well. I think this much more about reducing his tax burden from ~40% to ~20% than any sort of model introduced by the author.
yes, it sounds great at first (like he’ll be more accountable to the performance of AA this way) until you realize it’s actually just tax evasion!
Oh wow, a CEO gives up income for investment compensation, thus capping his income taxes at 15%-20% if he holds them for a year. Hehe, I wish I could do that.