Executive Bonus Formula 101

How AA Executives Bonuses Are Calculated

Per American Airlines’ Board of Directors “Compensation Committee,” 874 AA Executives will receive stock awards on April 18, 2007, based on the three-year relative performance of AMR’s stock vs. six other airlines from January 1, 2004, to December 31, 2006. The contest is set up with the following scale:

This year’s comparator airlines are: Continental, Southwest, JetBlue, Northwest, Delta and US Airways. When this document was last amended two weeks prior to the April 2006 bonus payout, three of the six comparator airlines were restructuring or had already restructured in bankruptcy, assuring AMR of a minimum 4th place finish and an assured payout of no less than a 75% multiplier.

For example, since AA came in first place, the elite managers will get 175% of their pre-determined targeted award from a pool of about 3.1 million shares. Multiply the first place factor (175%) by the stock price on payout day (April 18, 2007) and you have a total windfall upwards of a few hundred million dollars ($180 million as of April 9, 2007).

There are also about 900,000 deferred shares up for grabs as well (about $30 million more in stock as of April 9, 2007). These are awarded with no multiplier, which equals 100% of their value on payout day.

Bottom line, a target award of 3.1 million with AA landing in first place as it did for this year’s payout will nearly double the value of the payout using the 175% multiplier. The estimated total amount of stock to be awarded on April 18, 2007, is $210 million according to the stock price on April 9, 2007.

Although the majority of the 874 elite executives are undisclosed, this we know for sure:

Gerard Arpey will receive 135,000 shares of stock – times 175% – times the stock price on April 18th. Gerard is set to receive no deferred shares.

Dan Garton will receive 69,000 shares of stock – times 175% – times the stock price on April 18th. Dan is set to receive 26,000 deferred shares – times the stock price on April 18th.

Robert Reding will receive 51,000 shares of stock – times 175% – times the stock price on April 18th. Robert is set to receive 11,600 deferred shares – times the stock price on April 18th.

By the way, all 874 recipients are allowed to sell their stock bonus awards on April 19, 2007.

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