Boeing rightly cops flak over special bonus for new CEO

Boeing’s new CEO shouldn’t need an extra wheelbarrow of money to do his job.

David Calhoun officially took over the top role on Monday after the December ouster of Dennis Muilenburg over his ham-fisted management of the crisis engulfing the 737 Max. With the aircraft having now been grounded for 10 months in the wake of two fatal crashes, Boeing decided to promise its new CEO a $7m special long-term incentive award contingent on certain “key business milestones”, including the successful and safe return of the Max to service.

It’s hard to overstate the importance of getting the Max flying again for Boeing. Jefferies analyst Sheila Kahyaoglu had estimated the aeroplane maker was on track to burn through $4.4bn of cash every quarter that the Max was grounded before it decided to halt production entirely starting this month. The work stoppage is likely to cut that cash burn in half, though, while increasing the overall cost of the programme and significantly complicating the process of ramping it back up.

Every passing month also means more in compensation that Boeing owes to the airlines scrambling to adjust their schedules for a lack of Max jets. The Max’s return is Calhoun’s top priority as CEO.

The thing is, a mechanism already exists that compensates executives for doing what’s expected of them in their job. It’s called a salary.

Calhoun is already getting one of those to the tune of $1.4m annually. He is also due to receive a yearly bonus with a target value of 180% of that salary — or about $2.5m. That bonus will pay out at “no less” than the target in 2020, seemingly regardless of whether the Max is flying again.

Calhoun will also receive long-term incentive awards — which are separate from the Max-related bonus — with a target value of 500% of base salary (about $7m) and a supplemental award of restricted stock units valued at $10m meant to compensate him for rewards he forfeited at Blackstone Group to take this job.

Occasionally, you will hear the argument that executives need to be showered with money to make them willing to take on especially complicated situations.

General Electric (GE), which agreed to pay former vice-chair John Rice $2m a year plus health and equity benefits for a part-time role, comes to mind. I am sceptical that companies would have that hard of a time finding capable people willing to be the CEO of a major entity such as Boeing or GE, no matter how much it is struggling.

Most of the time, they are simply paying for the value of a well-known name. But regardless, those arguments have no place here. Calhoun has been on Boeing’s board since 2009. What happened with the Max is just as much a reflection on him as it is on Muilenburg. Salvaging his own reputation should have been incentive enough.

The special $7m bonus also drew the ire of three Democratic senators who called on Monday for Boeing to scrap the payout, warning that it “represents a clear financial incentive for Calhoun to pressure regulators into ungrounding the 737 Max, as well as rush the investigations and reforms needed to guarantee public safety.”

For a company that just last month was publicly dressed down by the Federal Aviation Administration (FAA) for its overly optimistic timelines on the Max return and the regulator’s concern that Boeing was trying to pressure it into speeding up the process, this is an extraordinarily bold and tone-deaf move.

Certainly a key part of returning the Max to service is smoothing over relations with the FAA and with Congress. So one could conceivably argue that just one day into his role, Calhoun is already not doing the job for which he is being so highly paid.

The other directors on Boeing’s board blessed this compensation arrangement. To my knowledge, none of them have offered to pay back the fees they received while watching this train wreck unfold, even as they (rightly) cancelled Muilenburg’s 2019 bonus.

For all of Boeing’s protestations about how it’s finally turned over a new leaf regarding transparency and accountability, all you have to do is follow the money to know the truth.

• Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies.

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