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Judge Approves UAL's Managers Incentive Plan
By Susan Carey, Staff Reporter
THE WALL STREET JOURNAL
Thursday, January 19, 2006

A federal bankruptcy judge overseeing the 37-month reorganization of United Airlines parent UAL Corp. overruled union and retiree objections to an equity incentive plan that will award 8% of the 125 million new UAL shares to 400 top managers of the airline.

During the first day of a hearing in Chicago to confirm UAL's reorganization plan, U.S. Bankruptcy Court Judge Eugene Wedoff listened to union complaints that the proposal is "excessive" at a time when other employees have made concessions to help the airline rebound financially.  But he said the U.S. Bankruptcy Code doesn't expressly call for a review of management compensation, so the only reasonable basis for a decision is if the plan is "what's done in the marketplace."

"It may be we have a culture in this country that overcompensates management," the judge said.  "But United is just one enterprise that operates in that general environment," and therefore it can't be expected to stand against the tide and be uncompetitive.  "The marketplace indicates this is a reasonable plan."

With input from outside compensation consultants, the human-resources subcommittee of UAL's board originally proposed giving management 15% of the new shares in options or restricted stock.  After the committee of unsecured creditors objected, the amount was reduced to 11% and later to 8%;  the creditors withdrew their opposition.

The plan approved yesterday calls for 9.8 million shares in the form of restricted shares or stock options to be made available to management, with the rights vesting over four years with the first 20% after six months.  The stock compensation isn't tied to performance.  Specific awards to top executives and lower-level managers haven't yet been set by the board.

If UAL's new shares trade at $15, as expected when the company steps out of bankruptcy next month, the total package has a theoretical value of $150 million.  But many observers believe UAL's stock will fare better, potentially enlarging the award.  United has said the math is highly speculative and the managers could reap far less over the vesting period.

While 8% of the 125 million new shares are going to managers, the majority of them will go to the airline's unsecured creditors, who are expected to receive four to eight cents on each dollar of claims.  UAL's existing common and preferred stock will be canceled and holders will receive nothing.

The judge resolved a thicket of other objections to United's turnaround plan, and the airline itself reached settlements with other objectors.  The confirmation hearing was scheduled to continue today and possibly tomorrow.  If Judge Wedoff approves United's plan, creditors and others would have 10 days to appeal before the airline could emerge.

United and its flight attendants union reached a tentative agreement to provide the attendants with a 401(k)-type pension plan in lieu of the defined-benefit pension plan that was turned over to the government.  The Association of Flight Attendants agreed to drop litigation over the plan termination and put the proposal to a ratification vote at the end of February.  As part of the deal, the attendants would receive $20 million in convertible notes in UAL that vest immediately, and the company initially would contribute 2% of each worker's salary into the new plan annually and match the employees' 3% contribution.

Three other underfunded UAL pension plans also were turned over to the federal Pension Benefit Guaranty Corp., and all the other United employees agreed to new defined-benefit plans and to take convertible notes to help make up for potential shortfalls they will experience when the PBGC makes pension payments to them instead of the airline.

The creditors and United also concluded negotiations yesterday on the composition of a new 12-member board, which will begin serving when the company emerges.  United was able to nominate five directors and retained five from its current board, including Glenn Tilton, the airline's chairman and chief executive, and Robert S. "Steve" Miller, CEO of auto parts supplier Delphi Corp.  Labor nominated its two current representatives, one representing the pilots union and the other the Machinists union.  The creditors committee named five new directors, including a retired railroad CEO, a retired financial company chief, a partner in a law firm, the CEO of the Aspen Institute think tank, and an executive of the Chicago Public Schools.

Write to Susan Carey at susan.carey@wsj.com

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