Citing losses since 2001 and expected losses of hundreds of millions of dollars in 2004, Continental Airlines reported that it will cut $500 million in payroll and benefits costs next year.
The airline’s reductions, which will take effect Feb. 28, are in addition to $1.1 billion in annual cost savings and revenue enhancements it had previously announced.
“To take the appropriate lead in these cost reductions,” the airline’s current president and chief operating officer and former CFO Larry Kellner has agreed to take cuts in base and performance pay, the company reported. Kellner, slated to become its chairman and chief executive officer at the end of this year, has agreed to reduce his base salary and his annual and long-term performance compensation by 25 percent as of Feb. 28.
Further, Continental executive vice president Jeff Smisek, the company’s president-elect, has agreed to reduce his base salary and his annual and long-term performance pay by 20 percent. Kellner and Smisek will also turn down their annual bonuses if they’re earned for 2004.
The company’s three other top executives, including the current finance chief Jeff Misner, marketing head Jim Compton, and operations chief Mark Moran agreed to reduce both their base salaries and their annual and long-term performance compensation by 20 percent.
About the overall payroll cuts, Bethune said: “This is a difficult and painful decision, but we need to take this action now, before we find ourselves in a severe crisis.”
Kellner joined the airline in 1995 as CFO and senior vice president and was named executive vice president and chief financial officer in November 1996. In 2003, he earned $586,000 in salary and did not take a bonus.
Kellner also entered into a compensation-cap agreement with the company that limited his compensation during the 12-month period beginning April 1, 2003. The cap was linked to the company’s reimbursement under the Emergency Wartime Supplemental Appropriations Act of 2003 for passenger-security and air-carrier security fees it paid.
As a condition of Continental’s reimbursement, the company agreed not to provide total cash compensation to either of its then most highly-paid named executive officers (Kellner and CEO Gordon Bethune) during the year beginning April 1, 2003 in an amount equal to or more than the annual salary paid to the executives in 2002, the company explained in its most recent proxy filing.
Under its agreement with the government, the company withheld additional amounts of salary from the two executives. At the end of the cap period, Bethune and Kellner were entitled to reimbursement of the withholdings. In the case of Kellner, the potential reimbursement won’t exceed $200,000.
As part of the cap, Kellner also waived his long-term incentive plan award for the performance period ending December 31, 2003 and agreed not to redeem his vested awards under the company’s incentive award program during the year beginning April 1, 2003. The value of the vested awards that Kellner would have been eligible to redeem in 2003 but for the compensation cap agreements is $732,476. He was able to redeem that amount on April 1 of this year.
In 2001, in the wake of the September 11 terrorist attacks and the company’s later payroll cuts, Kellner voluntarily waived his salary and any cash bonuses otherwise earned between September 26 and December 31, 2001.