Archive for category: Management

Explaining Pay Difference

Case: Delta
Ed Bastian’s profit-sharing formula stands as one of his biggest legacies. Originally, the formula gave employees 10 percent of Delta’s first $2.5 billion in pretax profits. They would then earn 20 percent of the profits beyond that $2.5 billion. Later, management brokered a deal with its flight attendants, mechanics, and customer-facing employees to trade a lower share of the profits for a sizable increase in base pay. Delta’s pilots—who are unionized—rejected that deal, however.
After a particularly profitable year in 2017, Delta wound up giving all of its employees the increase in base pay as well as using the original 10 percent and 20 percent formulas. As Bastion noted at a recent Velvet, “We’ll deliver over $1 billion to you in profit sharing on Valentine’s Day for the fifth year in a row.”* It is those kinds of compensation events that allow Delta employees to earn an average of 5 percent more than employees at American or United Continental. Such high compensation levels can have a number of motivational benefits. For example, they give Delta employees a sense of accomplishment and job security—especially with an employer that was recently bankrupt. They also provide a sense of occupational equity, given that employees are so much better off than peers at other airlines. A drawback of profit-sharing, however, is that it depends on so much more than employees’ collective efforts or job performance. For example, Delta’s investments in plane and terminal upgrades have constrained profit levels, as has a recent rise in fuel costs. And the increases in base pay have created their own drag on profit levels. It’s easy for employees to stay motivated when each year is as lucrative as the last one—or even more so. But what if things slow down, or even reverse?

To Bastian, the task becomes twofold. First, he needs to find the “sweet spot” for monetary incentives so that they can continue to motivate without becoming too expensive. “In the past couple of years,”* he notes, “we had a lot of cost inflation . . . in part because we still needed to catch up on labor from the big cuts following our bankruptcy . . . But now we’re caught up.”* His plan, moving forward, is to modulate base pay increases to the growth in the U.S. economy when accounting for inflation—a figure that is 4.5 percent at the time of this writing. Second, he needs to find new strategies for growing revenue at the company. Although such strategies are the realm of a different course, their success will affect Delta’s ability to motivate its employees.

1 Which motivational theories does Delta appear to be leveraging in its approach to motivation?
2 Picture being an employee of Delta during the period where the company transitioned into— and out of—bankruptcy. What motivational implications would that experience have, and how long would they last?
3 Which do you think is most motivational for Delta’s employees? Their high base pay, their generous profit sharing, or a CEO who is so accessible and communicative?