Jim Citrin Leadership by Example

How much are your honor and reputation worth? In the case of Gerald Grinstein, CEO of Delta Air Lines, it's worth well over $10 million.

This past week, Grinstein announced that he's refusing any and all of the compensation due to him, including cash, stock options, and restricted stock, when the No. 3 airline in the U.S. emerges from bankruptcy this spring or summer.

Instead, Grinstein has said that he'll contribute what he would have gotten in the post-bankruptcy pay due to him under his employment agreement to scholarships and hardship assistance for Delta employees, families, and retirees.

Two Views on Outgoing Compensation

Contrast Grinstein's words and actions with those of other recent high-profile cases, where tens of millions of dollars (or more) in compensation was awarded to chief executives removed from their positions for performance reasons. These individuals decided to accept what was legally due to them according to their employment agreements.

There are two views on this issue:

• The non-populist view

The market for leadership talent is ruthlessly competitive. The market and the board of directors determine CEO compensation levels, and, in terms of separation, the board knows what it's doing when it makes an executive appointment.

The outgoing compensation usually includes not just a severance payment, but back pay in the form of accelerated vesting of already-granted equity. This is the reward for all the work an outgoing CEO did over the tenure of the position.

Why is there so much focus on CEO compensation anyway, when top athletes and movie stars often make more for a season or film than even the best-performing stewards of our nation's economy? It's a double-standard.

After all, shouldn't there be outsized rewards for giving up 80 or more hours a week; being away from loved ones for long stretches; dealing with the 24/7 stress of living in the glare of restive shareholders; and being the bottom line for all of a company's actions and performance?

Finally, when a company faces bankruptcy, the pre-bankruptcy-protection shares of stock are usually rendered worthless, so it's only appropriate to renegotiate that component of compensation when the company's reorganization plan is filed.

• The Grinstein view

CEO compensation packages have simply gotten out of control. The ratio of annual CEO compensation to the average pay for employees rose from 107 to 1 in 1990 to 411 to 1 in 2005, according to the Institute for Policy Studies and United for a Fair Economy.

In addition, for Grinstein, it just wouldn't be right to take money that -- while contractually due to him -- isn't consistent with the spirit of what he's trying to accomplish at Delta: Make the airline the best-performing, most competitive carrier in the industry again.

Also, the compensation plan is intended as an incentive for future executive performance. Since Grinstein has announced that he'll step down once his mission -- bringing Delta successfully out of bankruptcy -- is complete, the plan shouldn't apply to him.

Deciding What's Right

For those faced with similar decisions, there are potential factors to consider:

• Need: Can you support your family by foregoing the outgoing compensation?

• Future achievement: Can you bounce back? Even in some of the most notable CEO ousters, there's a demonstrated track record of dramatically increased earnings, cash flow, revenues, and operational excellence.

• Age: Are you of an age where you feel you can take the money and run into a smooth retirement out of the public glare? Or do you want to position yourself for your next chapter by foregoing the money in favor of securing the moral high ground?

Given that Grinstein is 74 years old, his decision clearly isn't based on a cold analysis of what's better for his career. Rather than preserving his reputation for the next gig, he's guided by his moral compass in determining the right thing to do.

United in Name Only

Grinstein is determined to do what he can. He says that he's completely committed to helping Delta achieve enduring success. By extension, he wants Delta to lead by example as a company.

As part of its compensation plan filed this past week, Delta will award 1,200 senior managers 2.4 percent of new stock in the reorganized company. That compares markedly with United Airlines, for example, in which management pushed for the top 400 executives to receive 15 percent of the company's stock when it exited bankruptcy last year. When creditors pushed back, the United executives ended up receiving 8 percent of the equity.

Delta is going much further in broadly sharing the rewards from the painstaking work and sacrifices required to turn the airline around, which included slashing costs and benefits for the entire workforce.

Nearly 40,000 employees, including flight attendants, baggage handlers, and reservation agents, will share in 3.5 percent of Delta's new stock, plus $130 million in cash. This total value of approximately $500 million translates to a meaningful $12,500 per employee.

A Solid Turnaround

For the record, Grinstein has achieved dramatic results since he became Delta's CEO in January 2004. He guided the airline into bankruptcy protection in September 2005, and led an aggressive operational and financial restructuring intended to keep the company independent.

Delta merged its discount airline, Song -- a hit with customers -- into the core operation, negotiated massive compensation concessions, laid off approximately 6,000 employees, achieved other cost reductions totaling $2 billion annually, and fended off a $9.75 billion hostile takeover bid by US Airways Group, Inc. in January.

During this phase, and quite against the expectations of its competitors, Delta went on the offensive and pursued aggressive international expansion of its routes. At the same time, it was able to increase average fares and passenger load factors. Thanks to all of these efforts, in 2006, the company achieved its first full-year operating profit since 2000.

If I were to advise a CEO on which path to take when leaving a company, especially if he or she was removed for performance reasons, I would strongly urge following the one taken by Delta's Gerald Grinstein.