In an effort to keep lower-level managers to stay with American Airlines as it transitions out of bankruptcy and through its proposed merger with US Airways, the Fort Worth-based carrier announced changes to severance and profit sharing plans.
About 4,600 management employees are now guaranteed six months severance, regardless of their seniority, if they are laid off from American at any point in the next two years. The company will also offer a 10 percent profit sharing plan if American makes any income in 2013, according to a Thursday letter sent to managers from American senior vice president of people Denise Lynn.
The changes were approved by the bankruptcy court last week when U.S. bankruptcy judge Sean Lane approved American and US Airways merger agreement.
"Our overall approach to management compensation as we plan for the merger is to align American’s and US Airways’ compensation programs as much as possible, and continue to move our management pay to market levels over the next few years," Lynn said in the letter.
This group of managers also received a 3 percent raise in January.
Previously, American offered two weeks of severance pay for every year of service up to a maximum of 13 years, a payment equal to up to 6 months of salary. The new severance policy, which will take effect only if the bankruptcy court approves American's reorganization plan and the merger closes, gives managers a minimum of 6 months salary.
American's profit sharing plan used to pay managers after the carrier earned $500 million. The new plan is similar to US Airways' profit sharing plan which pays out at pre-tax margins.
Several of American's union groups negotiated 5 percent profit sharing plans in their new contracts, however, they chose to eliminate the profit sharing programs in exchange for raises over the life of the contract.
Keep reading for the full letter from Lynn.
Senior Vice President
April 4, 2013
Dear U.S. – Based Management Team:
As we continue to build on our successful restructuring, and work toward our merger with US Airways, we are beginning an exciting new chapter for American. On March 27, 2013, the Bankruptcy Court stated it would approve our merger agreement with US Airways, which includes certain plans relating to your compensation during this transitional time.
What this means for you is that, in addition to the 3 percent salary increase eligible employees received in January, eligible management employees levels 1-4 will share in our airline’s success through a 2013 Profit Sharing plan that will share 10 percent of American’s pre-tax income, with payouts aligned with US Airways at similar pre-tax margins. Payments under this plan will be made in March 2014, and are subject to confirmation and consummation of a Chapter 11 plan of reorganization and the closing of the merger.
I know it’s been a long time since we last made Profit Sharing payments. This year, with most of our restructuring efforts in place, if we all do our part to run a great airline for our customers, we are hopeful 2013 can be a profitable year. And, unlike our old Profit Sharing plan that didn’t pay unless we earned at least $500 million, our new Profit Sharing plan will pay as long as we earn a profit in 2013.
Example of a Profit Sharing Payout if We Achieve a 2 Percent Pre-tax Profit Margin
Pre-tax Profit Margin = 2%
(For every 1% of Pre-tax Profit Margin, the % of eligible earnings per employee is approximately 1.3%)
2013 Eligible Earnings
Profit Sharing Payout Amount (2.6% of Eligible Earnings)
(An employee may only participate in one short-term incentive plan. Award amounts may vary if you participate in a commissionable sales plan or other variable compensation plan. Additional information will be forthcoming.)
Our overall approach to management compensation as we plan for the merger is to align American’s and US Airways’ compensation programs as much as possible, and continue to move our management pay to market levels over the next few years. US Airways currently has a Profit Sharing pool of 10 percent, so this informed our decision.
We recognize there is some level of uncertainty involved in any merger, yet we want you to be able to focus on the job at hand with some degree of financial security. Therefore, we also have enhanced our severance policy for management to provide a minimum of six months’ severance pay, regardless of your company seniority. This enhanced policy will be in place for two years following the date of the merger.
The Profit Sharing plan and severance policy described above are contingent on confirmation and consummation of a plan of reorganization in American’s Chapter 11 case and the closing of the merger. More detailed information on these plans will be provided to you in the coming weeks, and the plan documents will govern in the event of any conflict with this letter.
With your continued leadership and commitment, we can ensure a successful merger and create a strong future at the new American. Thank you for all that you do.
Management Levels 1-4 Compensation
Questions & Answers
Will there be any additional base pay increases?
Management employees received a 3 percent salary increase effective January 16 as part of the management restructuring cost savings target adjustment. No additional pay increases are planned at this time.
PROFIT SHARING PLAN
Why is the profit sharing pool now 10 percent when it was previously 15 percent?
We moved all other workgroups to a 5 percent profit sharing plan as part of our restructuring cost savings adjustments, and the agreements with our unions will eliminate profit sharing altogether once the merger closes. While these workgroups have decided to eliminate profit sharing, we believe it is important for all management to have a component of your total compensation that allows you to share in the company’s success.
Will I receive severance pay if I’m not offered a position with the merged company?
You will receive severance under our current policy based on your company seniority. Once the merger closes we will enhance this policy for management to provide a minimum of six month’s severance pay regardless of company seniority. This enhanced policy will be in place during the two year period following the date of merger.
Are there any changes to severance travel privileges?
Our Reduction-in-Force policy provides 24 months of continuing travel privileges if an individual has no attendance occurrences within 90 days of the last day on payroll; otherwise, the policy provides 18 months of travel. We will continue to provide this 18-24 months Reduction in Force travel privileges for eligible employees laid off during the two years following merger closing.
Are there any changes to our current travel privileges?
No changes have been made to your travel privileges or eligibility for retiree travel. We do know that we will need to align the travel policies between the two companies and we understand how important this privilege is to eligible employees.