The federal government is offering a carrot to Air Canada to pay down the company's pension deficit, even as it wields a heavy stick in imposing detailed restrictions on how the company's executives are paid over the next seven years.
In an unusual move of government intervention in Air Canada's program of executive performance incentives, Ottawa will allow the Montreal-based airline's top executives to receive performance bonuses that grow as the company contributes money to its pension deficit.
Those bonuses, based on the company's financial performance, would be paid in full once the airline pays up to $200-million a year toward its pension deficit, according to union leaders who were briefed by Finance Minister James Flaherty about the conditions to be imposed on Air Canada executives.
As part of the deal announced Tuesday between Air Canada and the government, the airline has been given another reprieve on financing its debilitating pension deficit of $4.2-billion.
Over the course of seven years, beginning in 2014, Air Canada only has to contribute a minimum of $150-million a year, or an average of $200-million annually over seven years, towards its pension deficit – far below what regulations would normally require.
Air Canada and its unions have argued that low interest rates, and therefore low returns on pension investments, have made pension funding requirements too onerous, a problem faced throughout much of corporate Canada.
In granting this arrangement, the government has imposed conditions included limiting increases in executive pay to the rate of inflation, a prohibition on special bonuses and limits on executive incentive plans.
However, in a conference call and letters to unions on Tuesday, Finance Minister Jim Flaherty noted that the top 24 executives at Air Canada can still receive bonuses under the company's annual incentive plan, according to people who were part of the call and received the letter.
Union representatives confirmed that Mr. Flaherty told the unions that if Air Canada makes its $200-million annual pension payment, then the executives will receive their full annual incentive plan bonuses. (The annual incentive plan covers cash bonuses given when the airline meets its financial targets.)
If Air Canada only makes a payment of $175-million to its pension deficit in the year, the top executives would receive only half of their annual incentive plan, or AIP. If the airline only pays $150-million, then no performance incentives would be paid to the executives. Other bonuses, such as retention payments to keep an executive at the company, would be eliminated.
According to union representatives familiar with the arrangement, restrictions on stock options are unclear. As the letter sent to union explained, a "limit will be imposed on equity-based executive compensation and prohibit any special bonuses outside of the AIP while the regulations are in force, as long as Air Canada has not elected to opt out of the regulation."
Union representatives briefed about the arrangement said that the deal is still being hammered out between Air Canada and Ottawa and that the terms announced Tuesday were just the broad brush strokes.
Air Canada would not comment Thursday about the terms outlined in the conference call and the letter to unions. The arrangement still needs to be approved by an order-in-council before it turns into official regulation for Air Canada, union leaders explained.