MIAMI— Profit sharing or higher base pay? That is the question.
Delta Air Lines seems to have its own developing answer to the question, one apparently trending toward rewarding employees with a robust base pay and pushing away from strong profit sharing.
Delta announced on Wednesday that it plans to boost many front-line employees’ base pay by 14.5 percent, reports The Atlanta Journal Constitution. This will take effect on December 1, at which point most employees will make about 18 percent more than at the start of 2015, including raises the airline doled out in April. Accordingly, Delta also plans to scale back profit sharing, shifting a greater chunk of employee compensation to hourly rate and away from profit sharing bonuses.
Currently, Delta’s profit sharing scheme returns employees 10 percent of profits, and escalates profit sharing to 20 percent of profits if the company earns $2.5 billion or more in a given year. With its new layout, Delta benchmarks the trigger point to the prior year’s pre-tax profit, favoring the company during especially healthy years and making the hurdle tougher to clear, explains The Star Tribune. Last year, Delta recorded a $4.5 billion profit, which easily beats the old threshold. But while it’s a virtual certainty for profits to top $2.5 billion as things are now, reaching the 20% mark routinely will prove challenging for employees, requiring them to beat the prior year’s earnings time and time again for the extra money.
“Profit-sharing will remain a permanent part of your total compensation, but you have made it clear that you want more in your monthly paychecks,” CEO Richard Anderson and Delta’s President Ed Bastian told employees in a memo.
The airline also indicated it would increase its 401(k) contribution from 5 to 6 percent beginning in 2016. Overall, it would seem that the outlook for airline employees is trending upward – certainly from the financially-challenged days during bankruptcy – but many Delta employees would prefer more heavy profit sharing, despite the security afforded by higher pay rate. Additionally, Delta had very vocally supported the idea of profit sharing in the very recent past, so its decision marks somewhat of a shift in its corporate strategy.
The strong support for profit sharing would have been non-existent only a matter of years ago, with most airlines dwelling in the bankruptcy sewers and ridden with financial problems. But with surging profits, airlines have spread some of the wealth among those they employ – a dimension of their compensation to which employees have, unsurprisingly, taken a liking.
Proponents of profit sharing argue that it more appropriately rewards front-line employees, who drive its day-to-day operations, for an airline’s financial success. And many employees of Delta personally favor the profit sharing structure, despite what Anderson may say. It leads to juicer paychecks during profitable times, which most immediately bodes well for employees given the company’s current fiscal strength. Management’s decision comes in the face of some labor unrest with the airline’s pilot union regarding a similar matter. Delta’s pilots recently rejected a new contract partially due to concerns that it pared back profit sharing too severely (even though it included pay raises), clearly indicating its importance to these employees.
Critics of profit sharing would likely rebut that elevating standard compensation would be more fair. While profit sharing subjects employees to the industry conditions of the times, a higher base pay provides more stability and security. From Delta’s perspective, a more limited sense of profit sharing offers the company more cost predictability as well, and allows the airline to retain more of its money in wildly profitable years to invest at its discretion.
The announcement also signifies somewhat of a departure from the airline’s past positions, in which it vocally supported an emphasis on profit sharing and even criticized its peers for not doing the same. Delta boastfully claimed on its website just last year that its “people will earn on average 26% more total pay in 2014 than their American Airlines counterparts.” Calling out American, the article continued to proclaim that “the philosophy is different at Delta,” one with the goal of what Delta called a “consistently profitable” business model at the time.
American’s CEO Doug Parker responded saying profit sharing is “not the right way to pay 100,000 employees that don’t have that much impact on the daily profits,” instead tying profits more directly to items such as fuel prices and the global economic conditions. In any case, Delta’s beefing up of its base pay at the expense of profit sharing aligns it more with American’s approach, one more titled in the direction of strong base pay as the primary source of compensation. To be fair, Delta still engages more deeply with profit sharing than most of its competitors, even in light of the announcement, but it would seem the airline wants to somewhat back off from that approach, at the very least.
Delta’s straying toward a tighter profit sharing scheme certainly suggests the airline envisions impressive profits to continue for at least the near future. In this regard it would almost certainly agree with those who claim the announcement will result in a net benefit for the airline’s finances. Willing to guarantee its employees more money upfront, it more broadly represents a statement on the transformation of the industry, from persisting financial struggle to sustainable business practices. Dialing back the clock a short while, such a decision would have never presented itself, but Delta must ultimately believe the airline will keep more of its money while still achieving the aim of handsomely compensating its front-line employees.
Employees of Delta will soon enjoy a more hearty regular paycheck. But so long as airlines keeping the good times rolling, don’t expect the profit sharing tension to fade any time soon.