Thursday, January 19, 2006

Pay for What Performance?

"$400 awarded to each Alaska Airlines employee."

This headline could have just as easily read “Alaska Airlines Pays $4 million in bonuses for providing subpar customer satisfaction 1/3 of the time.” At the schools I attended, missing 1/3 of the answers was a score of 67% -- a “D” -- and I don’t remember any bonuses being paid for that.

The other interesting tidbit in this article is that Alaska missed its on-time goals 100% of the time in 2005 when compared to other airlines. But the company has nipped this problem in the bud. Rather than comparing itself to airlines with whom it competes in the marketplace, the company will now pay bonuses based on the percentage of flights it “expects to arrive on time each month” in 2006.

Incentive compensation design is a fascinating topic and pay-for-performance is one of the key issues in executive pay right now. I wonder how this message will play to Alaska Airlines shareholders: "We paid our employees an additional $4 million for failing 1/3 of the time on one measure; we failed 100% of the time on another measure and rather than fail 100% of the time again this year, we are lowering the goal so that we have a better chance of paying ourselves a bonus in 2006.” That is the sort of thing that shareholders at other companies are mad about.

I do not own shares of Alaska Airlines but do own shares of Southwest Airlines where customer satisfaction and on-time performance are not a basis for extra pay but a daily expectation and requirement. I'm unable to paste the stock price comparison chart of ALK vs. LUV into this blog but if you are interested you should take a look at it on Yahoo! Finance. A picture truly is worth a thousand words which is much too long for a blog, so I'll just say that some ALK shareholders may be asking for their $4 million back.


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