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Betting on SWA

On April 6, 2015, Southwest Airlines filed their annual proxy statement which included executive compensation at the airline. Chief Executive Officer Gary Kelly received some good news as he saw his stock award bonus rise 33% to roughly $3M, his non-stock incentives rise 20% to over $900K, and his annual bonus rise 11% to about $225K. His compensation package totals over $5M, a 24% increase over the last year. Well deserved, I say! After all, Mr. Kelly is the chief executive officer of the largest domestic carrier whose stock has risen over 125% in the last year, and over 240% since we started negotiations in 2011. Operating revenues have risen steadily over the last few years and the company posted over $1.4B in profit, doubling last year’s haul. Bravo!

For those unfamiliar with executive compensation, the board of directors decides to award a base salary and supplements executive pay with what they call “short-term incentives” or yearly bonuses. Bonuses are based on many factors including, but not limited to, operating revenue targets, ROIC, and even employee morale. The top executives at Southwest Airlines can make up to 150% of their base salary according to these metrics. COO Mike Van de Ven and CFO Tammy Romo have similarly structured agreements. They win big because they bet on Southwest.

Out of curiosity, what if a topped-out ramp agent entered the airline industry casino and bet on Southwest as well? Following the same betting strategy with the same payoffs, let’s see what his compensation package would look like after putting his chips on Southwest. Let it roll! Baby needs a new pair of shoes. If his base salary is $54k, his stock award bonus would be $240k, non-stock incentives would be $72k, and his annual bonus would be $18K, bringing his total compensation package to a whopping $384k. Not bad considering we haven’t included deferred compensation, profit-sharing, and other trickles of money.

A ramp agent could do well for himself betting on Southwest. Over 40 years of profitability tells me he’s much more likely to win than to lose. Expected value of each bet seems to rise, so what’s the big deal if he has a bad hand every so often? Even if he loses, he still gets his base salary. Now that’s a win-win! All arrows point to him taking the plunge with the intrepid and risk-loving executives. After all, he’s on their team working towards the same goals. Everyone’s interests are aligned and cooperation is paramount to the success of the airline.

The truth is our interests are not aligned. One of the metrics used to calculate executive pay is labor cost. Executive pay rises as your pay remains stagnant, a negative correlation. That’s a bit of a buzzkill, but at least you can still bet on Southwest and rake in the dough with bonuses. Wrong, again. The casino where you make your bets is not the same casino where executives place theirs. You have to bet at their casino: they are the house. Between the years 2006-2007, TWU Local 555 lost a ten year bet. The house won. Now the house is asking you to bet on them again, except the game is just as hard, but the payoffs are significantly less. I don’t begrudge Mr. Kelly for what he makes but offer the same relative payoffs for making the same bets.

Here’s a bet you can make: bet on yourselves. In these negotiations, know your worth and don’t settle for less. Bet on your brothers and sisters to stand firm in negotiations. Bet on your resolve to get a fair and equitable contract. Bet on the idea that the many can overcome the few, and that your hard work will be rewarded. Southwest has posted over $3B in profit since we began negotiations in 2011. That’s a winning hand. We are one union with over 10,000 chips. We’re all in.