A Financial Revolution 

February 08, 2006
UAL Scoreboard: Management $480M, Shareholders & Employees $0

Ben Stein penned a recent article criticizing management at UAL, parent of United Airlines. Mr. Stein wrote:

In the early 1990's, when some investment bankers were casting around for a way to make tens of millions of dollars, they came up with a doozy: the employees of UAL would give up some of their salaries and benefits in exchange for stock in UAL, eventually becoming UAL's largest owner through an employee stock ownership plan.

The deal went through – with staggering compensation to Wall Street – and in 1994 the American employees of UAL, as a group, became its largest owners...

Trouble was not far behind. The employees found management demanding pay cuts, big (and, for passengers, inconvenient) changes and cuts in scheduling and services... Then came the blows of 9/11 and a recession, and then rising fuel costs. There were demands for more cuts in pay and benefits and more layoffs. That was not enough. About three years ago, UAL was "forced" to enter bankruptcy to stay alive.

This step meant that UAL could drastically cut workers' pay – and it did. Pensions were simply jettisoned and made the burden of the federal government's Pension Benefit Guaranty Corporation, which meant cuts of close to two-thirds in some pilots' pension payments. And, of course, the bankruptcy simply eliminated all of that equity in UAL that the employees had bought with their hard-earned savings.

Thus, in a series of evil events, management of UAL basically ruined the lives of the employee-owners, if that is not putting too fine a point on it, by taking away their savings, incomes and pensions...

While some readers may simply say that management had no choice in a challenging market – high fuel costs, increased competition, high legacy costs, and, initially after September 11, reduced demand – there is a new twist to the story:

Now UAL has been reorganized. It is preparing to emerge from bankruptcy. It will soon have a stock offering. This offering is expected to raise very roughly $6 billion...

Here comes the good part: management has asked the bankruptcy court to let it have – free – roughly 15 percent of the stock in the new company, or about $900 million. Mr. Tilton, the chief executive... would get about $90 million personally for his hard work shepherding UAL through bankruptcy (for which he was already paid multiple millions of dollars).

The bankruptcy court, instead of ordering Mr. Tilton's arrest, instead cut the management share to about 8 percent, so he will get more than $40 million, more or less...

So here it is in a nutshell: employees are goaded into investing a big chunk of their wages and benefits in UAL stock. They lose that. Then they lose big parts of their pay and pensions. They become peons of UAL. Management gets $480 million, more or less. "Creative destruction?" Or looting?

Wait, Mr. Tilton and Mr. Bankruptcy Judge. The employees were the owners of UAL. They were the trustors, and Mr. Tilton and his pals were trustees for them. How were the trustors wiped out while the trustees, the fiduciaries, became fantastically rich? Is this the way capitalism is supposed to work? Trustors save up, and their agents just take their savings away from them?

If the company is worth so much that management has hundreds of millions coming to them, shouldn't the employee-owners get a taste? Does capitalism mean anything if the owners of the capital can be wiped out while their agents grow wealthy? Is this a way to encourage savings and the ownership society? Or is this a matter of to him who hath shall be given?

Perhaps it's because I'm related to a flight attendant and know many UAL employees (I'm a very frequent flyer), but I think Mr. Stein's question about looting is right on. We’ve seen a steady climb in CEO compensation over the past decade and it is once again reaching dizzying heights. I don’t fault anyone for making money, but I do question whether the CEOs of the Fortune 500 deserved a 54% pay increase from 2003 to 2004 while worker compensation remained flat and shareholder value remained below 2000 levels. What are your thoughts? Is this fair?

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Anonymous Anonymous said...

Why am I not surprised? Maybe the tide is turning. I see more and more stories about CEO excess. And of course there are the Worldcom, Tyco and Enron trials.

2/08/2006 9:56 PM  

Anonymous anonymous said...

Why isn't there a law that freezes trade on a stock when the company goes into bankruptcy? I read that there is only a one percent chance of a company honoring its stock when in bankruptcy so why try and fool the shareholders into a false sense of security. Freeze trade on worthless stocks and protect the american investor or is corporate america willing to repeat the crash of 1929.

3/14/2006 11:46 AM  

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