Five years ago, 346 people tragically died in two separate crashes of Boeing’s 737 MAX airplanes. Both crashes were due to seriously flawed design features and inadequate training for pilots. More recently, a harrowing incident occurred when a plug door blew out of a Boeing plane when it was at an altitude of almost 16,000 feet. While the blowout fortunately involved no fatalities, it did show that the changes, if any, in management and internal processes made in response to the crashes were inadequate to address safety issues. Adding to a long list governance problems and misconduct cases since the beginning of 2024, the Federal Aviation Administration (FAA) on May 6, 2024, announced that it would look into whether Boeing had falsified records of inspection of its 787 Dreamliner planes.[1]  On May 14, 2014, the press reported that Boeing breached a 2021 737 MAX criminal prosecution deal.[2] (see Coffee, 2022, for discussion on Boeing’s criminal prosecution deal).[3]

Boeing has yet to provide a comprehensive plan for restoring confidence in its operations and protecting the safety of millions of airline passengers. In response to pressure by lawmakers and its stakeholders, the company recently said that it would restructure its bonus plan with a heavy emphasis on safety.[4] The plan would cover slightly less than 7 percent of the company’s work force. But safety issues and maintenance problems might not come to light for years, and employees could transfer to other divisions or even leave the company, which would limit the effect on safety of Boeing’s bonus scheme.  What’s more, it is difficult to have confidence that managers who have already gotten so much wrong will execute the new compensation plan correctly.  In this post, I offer an alternative to the company bonus plan that I believe will be more effective.

Boeing should institute a compensation structure that rewards employees for performance and functions as a control mechanism. An effective compensation design would encourage teamwork among employees and monitoring to detect defective work or unsafe practices. It would also reward employees for good work and internalize the cost of negligence. Paying a price for defective work completed by a coworker in a division is likely to turn every worker into a vocal advocate for safety. Staying silent or being passive becomes costly (see Mehran, 2021, for a discussion of this issue).[5]

An effective reward structure would operate as a performance bond (see Becker and Stigler, 1974),[6] just as security deposits in rental markets ensure that tenants maintain the property and bail bonds help guarantee that legal defendants will not flee. A pay policy that would likely be effective at Boeing is a broad-based restricted stock plan (see Mehran, 2021, for a detailed discussion of the topic in the context of Boeing). The plan could be subject to a uniform vesting period of about three years, and the grant value could be about 5 percent to 10 percent of total pay for new hires and current employees.  The details would need to be refined and adjusted with experience. To avoid sudden changes in employees’ income and liquidity, the plan should be phased in gradually, perhaps over four years. The vesting period and the grant size relative to total pay could vary with employee rank. The plan also should cover employees in bargaining units (nearly 35 percent of Boeing employees are unionized). Tying pay to performance through adoption of a restricted stock plan is a form of indexation and a departure from pay practices for unionized employees at Boeing and elsewhere,  but it is likely to have a positive influence on contract negotiations and the work dynamic at Boeing. For example, Crampton, Mehran, and Tracy (2008) argue that adoption of employee stock ownership plans (ESOPs) reduces labor disputes.[7]

Typical restricted stock plans are awarded to promote retention, among other things. They have vesting features (cliff or uniform), and employees forgo their claims on unvested shares should they decide to leave the firm.  The aim of the proposed restricted stock plan is to cultivate employee ownership and is not intended to be punitive. The shares granted are part of the annual compensation and are similar to cash compensation.  The vesting requirement is needed to ensure that the work was performed.  Thus, the scheme should not affect labor mobility, as employees departing voluntarily would give up only a fraction of their stock awards in the last year of their employment.  Their unvested stock grants earned in the year of departure and the previous two years would be awarded once they were vested.  However, if it were determined that a former employee failed to execute a task correctly, Boeing could claw back the unvested portion of the employee’s restricted stock grants, just as a landlord could keep a tenant’s security deposit.

Consider how a broad-based restricted stock plan might have helped address problems with the Alaska Airlines Boeing 737 MAX, which suffered the door plug blowout. How the labor force and the inspectors failed to notice missing bolts remains a puzzle. If they were negligent, and the restricted stock compensation scheme had been adopted, Boeing could have considered clawing back unvested restricted stock awards held by division employees directly involved with the production process, including those held by management overseeing the process.  Given that possibility, the proposed compensation plan likely would have improved due diligence at Boeing and possibly avoided the problems caused by missing bolts. The incentives for enhanced monitoring and teamwork among coworkers ultimately could have benefited all stakeholders, including Boeing’s shareholders and its employees.

Managers would need to justify clawing back unvested restricted stock awards, and current and former employees would be able to challenge a clawback to ensure that it was not being used merely as retaliation.  What is important is to preserve the benefits of the proposed compensation scheme and increase incentives that emphasize safety and help improve the culture at Boeing.

Broad-based employee restricted stock plans should receive support from stockholders and creditors because they would protect stockholders from big losses following major accidents, making dilution as a result of stock grants less of a concern. The reduction in risk means that Boeing also potentially benefits from an improved credit rating. Some adjustments would surely be necessary to account for the deferral of pay and loss of liquidity for workers. Boeing could grant more shares when the company is healthy to compensate for the liquidity loss. The grant would be justified as helping to avoid costly losses from incidents such as the MAX accidents (a loss of value of about 50 percent) and as creating a more stable working environment by making layoffs such as those that followed the MAX crashes unnecessary.

To be sure, Boeing has lots to do on many fronts to address its safety concerns.  Instituting a more effective compensation plan at the company could contribute to establishing safety and restoring trust among airline passengers.

ENDNOTES

[1] https://www.bbc.com/news/business-68966894

[2] https://www.nbcnews.com/news/us-news/boeing-breached-21-deal-shielded-criminal-charges-737-max-crashes-doj-rcna152302

[3] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4105514

[4] https://www.reuters.com/business/aerospace-defense/boeing-tie-more-employee-bonus-pays-safety-wsj-reports-2024-03-08/

[5] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3836274

[6] https://www.jstor.org/stable/724119

[7] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1266717

This post comes to us from Hamid Mehran, a financial economist who served as a staff economist at the Federal Reserve Bank of New York.