The ABCs of PBP
How Alaska’s annual bonus plan
can stretch your paycheck
November 12, 2009
Alaska Airlines’ Performance Based Pay annual bonus plan was created in 2004 and has included management and dispatchers for several years. Pilots, flight attendants and mechanics joined PBP earlier this year when they ratified new or extended contracts. IAM members are now considering contract extension proposals which, if ratified, would bring all remaining Alaska employees into the plan.
To gain a better understanding of PBP, Alaska’s World posed several questions to Alyssa Edwards, director of compensation and employee travel, and resident expert on the company’s pay incentive plans.
AW: What is PBP?
Edwards: The Performance Based Pay plan is part of Alaska Air Group’s “Shared Rewards” incentive program. PBP is an annual bonus that’s paid early each year (in February or March) to help employees stay focused on key actions that make Alaska successful — and reward them when we achieve these goals.
Shared Rewards includes two other components. One is the company’s annual Profit Sharing Plan, which currently covers IAM employees. The other component is the Operational Performance Rewards program. OPR pays every employee a monthly bonus of $50 when we achieve our on-time goal and another $50 when we achieve our customer satisfaction goal.
What are the goals of PBP?
Edwards: PBP is based on the company’s strategic goals in order to help move the business forward and ensure our long-term growth and profitability. Safety and compliance is always our No. 1 priority, which is why it forms the base of our strategy pyramid. On top of that, we focus on a reliable operation, competitive costs and customer loyalty. Achieving these goals leads to our overall objective of long-term growth and profitability.
Every year, Alaska Air Group’s board of directors works with the company’s top leaders to establish specific measures for PBP that relate to these strategic goals. Here are the PBP measures for 2009 and Alaska Airlines’ progress in achieving them:
Safety: No employee or operational-related deaths and an average of no more than 4.44 lost-time injuries per 100 employees (full-time equivalent) throughout the year. We have not met this target yet.
Customer satisfaction: Overall OPR customer satisfaction score of 75 percent or more for at least three months of the year. We’ve achieved this goal eight out of nine months through September.
Costs: Average annual cost per available seat mile (excluding fuel) of 8.1 cents. The company has told Wall Street analysts it does not expect to meet this target in 2009.
Profit: Alaska Air Group profit of at least $75 million before paying taxes and not including fuel hedging, special one-time expenses such as fleet transition costs and money the company sets aside for Shared Rewards. We exclude monthly OPR payouts and annual bonuses so employees aren’t penalized by having to meet a profit goal that includes their own incentive pay.
Wall Street analysts estimate Air Group will earn a profit of more than $200 million for 2009 — not including the items I just mentioned — although we have one more quarter to get through and winter is historically a tough one for us.
Operational reliability: On-time rate of 80 percent or ranking among the top three of our relevant competitors (based on Department of Transportation rules). We’ve achieved this goal for seven months through October.
How do all of these measures determine the amount of the PBP bonus?
Edwards: First of all, safety, customer satisfaction and costs each make up 10 percent of the bonus. Air Group’s profitability makes up the remaining 70 percent. I’ll talk about the operational reliability measure in a minute.
Secondly, the board of directors sets three benchmarks for each measure so that the bonus increases the more we exceed our initial goals. These three benchmarks are called “Threshold,” “Target” and “Maximum.”
The threshold benchmark represents the minimum performance the company must achieve in order for employees to receive a bonus. Meeting our threshold goals for safety, customer satisfaction, costs and profit results in a 25 percent payout for each measure.
The target benchmark represents aggressive, yet attainable goals. Meeting our target goals results in a 100 percent payout for each of the four main measures.
The maximum benchmark is a stretch goal. The payout for each measure increases as we exceed our target goal — up to 200 percent if we reach the maximum goal.
On top of all that, PBP bonuses are affected by how well we achieve our on-time performance — we call this a “modifier.” It’s a little like earning extra credit in school. Once we achieve our on-time goal for six months, the PBP bonus goes up 2 percentage points for each additional month we hit that target. On the flip side, the bonus goes down 2 percentage points a month if we fail to achieve our on-time goal for more than half of the year. It’s not an issue in 2009 since we’ve hit our on-time goal for seven months so far. If we meet it in November and December, the reliability modifier will increase the PBP bonus a total of 6 percentage points.
In practice, the measures for safety, customer satisfaction, costs and profit each pay different percentages, depending on how well we succeed in achieving the different benchmarks. And we also have to factor in the on-time modifier. The bottom line is that an employee’s PBP bonus — assuming we meet at least some of our threshold benchmarks for a payout at all — will range from 1.25 percent of annual eligible earnings to as much as 10 percent. Based on Wall Street profitability estimates and our success in achieving other PBP goals during 2009, we currently project that employees will receive a bonus of 7.8 percent of their annual earnings.
To make it easy to determine your estimated 2009 bonus, we’ve created a calculator on the PBP Web page. It’s accessible by clicking the orange “Calculate Your PBP Bonus” button in the North of Expected box on the alaskasworld.com home page. Just type in your annual earnings and you’ll see the current estimate. But please remember this figure will likely change before the year ends.
Why is PBP so complicated?
Edwards: We didn’t set out to make the plan hard to understand. The intent of PBP is to reward employees for their actions in specific areas that make Alaska successful. That’s why we include different measures in addition to profit. The board and Alaska’s leaders also thought it was important to increase the bonus if we surpass our minimum targets — like a sliding scale — rather than paying a set amount regardless of how much we exceed any given goal — like a simple “pass-fail” system. Those features add a little complexity to PBP.
In contrast, the company’s Profit Sharing plan is simpler, but it’s based solely on Air Group’s profitability and is set at a maximum of 5 percent of our profit. Last year, profit sharing checks were negligible because the company made just $4 million. But the PBP bonus amounted to a respectable payout because of how well we achieved our other goals.
For more information about PBP, check out the PBP Web page on alaskasworld.com. You can also watch a 12-minute Web presentation that covers the information I’m talking about in a more visual format. Go to the PBP Web page and scroll down to the “Learn more about” box.
You said earlier that the board of directors establishes different PBP measures each year. Why is that? And what’s to prevent the board from discontinuing the plan?
Edwards: Regarding your first question, Air Group’s board considers our company’s performance and the industry’s overall outlook when it establishes PBP goals for the coming year. To help Alaska keep improving, the goals often get a little tougher each year. But that’s not always the case. When the board established the company’s profit goals for 2009, for example, the industry was confronting the worst recession we’ve had in decades. As a result, they set benchmark profit figures that were lower than those in 2008.
As to your second question, the board does have the power to discontinue the PBP plan, but that wouldn’t make sense. The board strongly believes in paying employees market competitive wages — and then rewarding us with OPR and PBP when we achieve our strategic goals. The more successful we are at achieving our strategic goals, the more customer loyalty we cultivate and the company becomes more profitable. And that enables us to grow and provides shareholders with a reasonable return on their investment.
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