2018 Guide to Effective Proxies

6 TH EDITION | GUIDE TO EFFECTIVE PROXIES 258 AMERICAN AIRLINES GROUP • Alsoathisrequest,inApril2016,ourCompensationCommitteeagreedtoeliminatehisemploymentagreementand ourobligationsundertheagreementsuchthatMr.Parkerisnolongercontractuallyentitledtoreceiveasetlevelof compensationandbenefitsandisnolongerprotectedbythechangeincontrolandseveranceprovisionsofthat employmentagreement.However,notwithstandingtheeliminationofMr.Parker’semploymentagreement,hehas agreedtoremainobligatedwithrespecttotheemploymentagreementcovenantsthatrequiredposttermination confidentialityandnon-solicitationofemployees. • In2017,attheirrequest,alloftheexecutiveofficerswhowerepartytochangeincontrolandseverancebenefit agreementsvoluntarilyterminatedtheiragreements.Asaresult,noneofourexecutiveofficersisnowcontractually entitledtoanycashseveranceorcontinuedhealthbenefitsuponanytermination,norarewecontractuallyobligated toprovideagross-uptocoveranyexcisetaxesincurredbyanynamedexecutiveofficerunderSection4999ofthe InternalRevenueCode. CompetitiveCompensation;EmphasisonPayforPerformance For2017,Mr.Parker’stotaltargetdirectcompensation,whichwasprovidedsolelyintheformoflong-termequity incentives,wasset3%higherthanhis2016totaltargetdirectcompensationconsistentwiththebudgetedincreaseforthe broadersupportstaffandmanagementpopulation.Thisresultedintotaltargetdirectcompensationthatwasbelowthe averagetotaldirectcompensationofhispeersatDeltaandUnited(usingthemostrecentpubliclyavailabledataasof June2017). Thetargetdirectcompensationprovidedtoourothernamedexecutiveofficersiscompetitivewiththatoftheotherlarge networkairlines.For2017,ourothernamedexecutiveofficersreceiveda2.8%merit-basedincreasetotheirtotaltarget directcompensationover2016levelsconsistentwiththebudgetedincreaseforthebroadersupportstaffand managementteampopulation,otherthanMr.Isom,whoreceiveda6.3%increaseinconnectionwithhispromotionto Presidentin2016.Inaddition,between85%and90%oftheir2017totaltargetcompensationwascomprisedofvariable pay.Asaresult,thecompensationultimatelyrealizedbyourothernamedexecutiveofficerswillbesignificantly determinedbyourfinancialperformanceandtheperformanceofourstock,andisthereforecloselyalignedwiththe interestsofourstockholders. Paymix .Thepiechartsbelowshowthetargetmixofeachelementofthe2017totalcompensationpackagefor(i)our ChiefExecutiveOfficerand(ii)ourothernamedexecutiveofficers,showingourstrongemphasisonvariablepay,which canonlybeearnedbasedonthekeyperformanceobjectivesdiscussedinthesectionbelow. CEOTargetDirectCompensation Long-term Equity Incentives 100% Base Salary 13% Annual Cash Incentive 19% Long-term Equity Incentives 68% NEOTargetDirectCompensation KeyPerformanceObjectives Wedesignourannualandlong-termincentivestoincludeperformancemetricsthatfocusonprofitability,operating efficiencyandinvestorreturns. Forour2017annualcashincentiveprogram,weretainedtheoverallstructureandperformancemetricsunderour2016 annualcashincentiveprogram.Asin2016,our2017annualcashincentiveprogramwasbasedonpre-established adjustedpre-taxincometargets.Webelievethatpre-taxincomeisaneffectivewaytocapturecostmanagementand revenueperformance.Undertheprogram,theshort-termincentivetargetpaymentwaspayableifweearned$5.0billion inpre-taxprofitin2017,whichtheCommitteebelievedwouldbeachallenginggoal,andnoincentivewouldbeearnedif pre-taxprofitwasbelow$3.0billion.TheCommitteeiscommittedtosettingrigorousgoalsundertheshort-termincentive programandsettheselevelsfollowingconsiderationofbudgetedperformance,takingintoaccountfuelpriceenvironment andotherbroadmarketfactors,aswellasplandesignconsiderations.In2017,weachievedanadjustedpre-taxincome ofapproximately$4.2billion,whichcorrespondedtoachievementat79.1%ofthetargetlevelunderthe2017cash incentiveprogram.Basedonthefundinglevel,eachparticipatingexecutiveofficerreceivedabonusat79.1%oftarget. 2018ProxyStatement | 47 Total of 04 pages in section • Weinvestedmorethan$300millioninfacilitiesandequipmentincludingrenovationstoteammemberspaces, mobiledevicesforpilotsandflightattendants,andtheOneCampusOneTeaminitiativeatourglobalsupportcenter inFortWorth. • Wekeptteammemberpaycompetitivethroughinitiativessuchasamid-contractsalaryincreaseforpilotsandflight attendantsandcontinuedstepincreases,aswellasamid-contractpayincreaseformechanicsandfleetservice workers.Inearly2018wealsosharedbenefitsoftherecentTaxCutsandJobsActthrough$1,000paymentstoall non-officerteammembers. • Weintroducedbest-in-industrymaternityandadoptionbenefits. • Weconductedourfirstteammemberengagementsurveyinoveradecade,andwewillcontinuetoactonthe resultssothatAmericancontinuestoimproveasaworkplace. • Weprovidedcustomerserviceskillstrainingto35,000teammembersthroughElevatetheEverydayExperie ce training. • WerolledoutourLeadershipModelduring2017,whichdefinestheattributesandexpectationsforleadersat American.In2017,4,000leadersparticipatedinleadershiptrainingdesignedtohelpthemsupportourfrontlin team members.Higherlevelleadersunderwentadditionaltrainingtofurtherlisteningandcoachingskillsduring2017,and thissametrainingwillrolloutmorebroadlyin2018.Wealsobegandevelopmentofimplicitbiastrainingforl aders andourfrontlineteamduring2017.Allofthistrainingsupportsourimperativetomakecultureacompetitive advantageforAmericanAirlinesbybuildingleaderswhosupportthefrontlineteam. EnsureLong-TermFinancialStrength. Toensureourlong-termcompetitivenessintheglobalaviationindustry,weare focusedoncapturingtheefficienciescreatedbythemerger,deliveringonAmerican’searningspotential,andcreating valueforstockholders.Inthefourfullyearssincethemergerclosed,thecompany’scumulativepre-taxearningswere $15.2billion,or$19.4billionexcludingnetspecialitems. • Wereporteda2017pre-taxprofitof$3.1billion,or$3.8billionexcludingnetspecialitems. • Wereturned$1.7billiontoshareholdersin2017,includingtherepurchaseof33.9millionsharesanddividend paymentsof$198million. • Sincemid-2014wehavereturned$11.4billiontoshareholders,reducingoursharecountby37percentto 475.5millionsharesattheendof2017. SeeAnnexAforareconciliationofpre-taxprofitexcludingnetspecialitems,anon-GAAPmeasure. ThinkForward,LeadForward. Wearecommittedtore-establishingourselvesasanindustryleaderbycreatingan action-orientedculturethatmovesquicklytobringproductstomarket,embracestechnologicalchangeandquicklyseizes uponnewopportunitiesforournetworkandourproduct.During2017: • Weacquired2.7%oftheoutstandingsharesofChinaSouthernAirlines,thelargestairlineinChina. • Weextendedourtrans-AtlanticJointBusinessAgreementwithourairlinepartners. • Wecommittedmorethan$1.6billiontoimproveLAXTerminals4and5,settingthestageforAmericantoreceive additionalgates,strengthenourPacificgatewayandbethepre-eminentairlineforLosAngeles. • WehaveagreedonanewleasethatwillredevelopORDoverthenext10to15years,givingusfurtherroomto growourORDoperation.Webuiltafive-gateexpansionatORDTerminal3,givingAmericananewadvantageat thiskeycompetitivehub. OurCommitmenttoFairPayandPayforPerformance OurCEOandotherexecutiveofficershavedemonstratedtheircommitmenttofairpayandpayforperformanceby initiatingthefollowingexceptionalactionswithrespecttotheircompensation. • Beginningin2015,atMr.Parker’srequest,weprovide100%ofhisdirectcompensationintheformofequity incentivesinlieuofbasesalaryandannualcashincentivecompensation.Thathashelpedtoadvanceour commitmenttopayingforperformanceandaligningMr.Parker’sinterestswiththatofourstockholders.Morethan halfoftheseequityincentiveswillbeearnednotearlierthanthethirdanniversaryofthegrantdatebasedonour relativepre-taxincomemarginandtotalstockholderreturn(TSR)performance. • Athisrequest,Mr.Parker’stargetdirectcompensationhasbeenhistoricallysetatbelowtheaverageforhisp e sat DeltaandUnited. 46 2018ProxyStatement | COMPENSATION DISCUSSION AND ANALYSIS Overview Thissectiondiscussestheprinciplesunderlyingourcompensationpoliciesforour“namedexecutiveofficers,”whofor 2017are: • W.DouglasParker,ourChairmanandChiefExecutiveOfficer; • RobertD.Isom,ourPresident; • StephenL.Johnson,ourExecutiveVicePresident—CorporateAffairs; • DerekJ.Kerr,ourExecutiveVicePresidentandChiefFinancialOfficer;and • MayaLeibman,ourExecutiveVicePresidentandChiefInformationOfficer. Asdescribedmorefullybelow,ourcompensationstrategyisdesignedtoprovideatotalcompensationpackagethatwill notonlyattractandretainhigh-caliberexecutiveofficersandemployees,butonethatwillalsoalignemployee contributionswithourcorporateobjectivesandstockholders’interests. Executive Summary 2017wasagreatyearforAmericanAirlinesthankstotheworkofourover120,000full-timeequivalentteammembers. Wearefocusedonfourlong-termstrategicobjectivestoguideourthinkinganddecisionsandkeeptheentireteam focusedonmanagingAmericanforthelong-term.Theyare:CreateaWorld-ClassCustomerExperience,MakeCulturea CompetitiveAdvantage,EnsureLong-TermFinancialStrengthandThinkForward,LeadForward. CreateaWorld-ClassCustomerExperience. Wearedeliveringvaluetoallcustomers,especiallypremiumcustomers, aswellasdrivingoperationalexcellenceandstrengtheningournetworkbygrowingwherewehaveacompetitive advantage.During2017: • Werecordedourbeston-timedepartureandarrivalperformancesince2003,andourbestbaggagehandling performancesinceDOTbeganreportingin1994. • Weexpandedtheairline’sglobalfootprintbylaunchingLosAngeles-to-Beijingservice,andannouncedservicefr m PhiladelphiatoPrague,CzechRepublic,andBudapest,Hungary;Dallas-FortWorthtoReykjavik-Keflavik,Iceland; andChicago-O’HaretoVenice,Italy,whichwillstartthissummer. • Weoperatetheyoungestfleetamongourpeersandinvested$4.1billioninnewaircraft,includingourfirstBoeing 737MAX.Bytheendof2018weexpecttoinductatotalof20newMAXaircraft,whicharereplacingolder,lessfuel efficientaircraft. • Weintroducednewstreaming-capablesatellite-basedinternetaccessonnarrowbodyaircraft,startingwiththe737 MAXandexpandingsoontomostofourdomesticmainlinefleet. • WeintroducedBasicEconomytocompetewithultralow-costcarriers.Thisproductisnowofferednationwideandto leisuremarketsinMexicoandmostoftheCaribbean. • WeexpandedPremiumEconomy,whichoffersawiderseat,morelegroom,anamenitykit,andenhancedmeal choicesoninternationalflights.AsofMarch14,69widebodyaircraftofferthisproduct.WeexpecttoofferPremium Economyonmostofourwidebodyfleetbymid-2019. • Welaunchednewproductstomeetcustomerdemand,includingtheexpansionofAmerican’sbest-in-classlounges byopeningFlagshipFirstDining,anewexclusiveexperienceforcustomersinFlagshipFirstoninte nation land A321Ttranscontinentalflights.AmericannowoffersFlagshipFirstDininginMiami,LosAngeles,andNewYork- JFK.AmericanistheonlyU.S.airlinethatoffersinternationalfirstclass. MakeCultureaCompetitiveAdvantage . Americaniscreatinganenvironmentthatcaresforfrontlineteammembers, developinginnovative,inspiring,andcaringleaders,andequippingourteamwiththetoolstosupportourcustomers. • Weawardedeachteammemberwithtwocomplimentaryround-tripticketsacrossAmerican’sglobalnetworkto commemoratebeingnamedAirTransportWorld’s2017AirlineoftheYear. • AfterhurricaneshittheCaribbeanandFlorida,AmericanAirlinesteammembersworkedtogethertohelpthepeople ofSanJuan,PuertoRicoandotheraffectedpartsoftheregion.Americanandourteammembersdeliveredmore than2.5millionpoundsofreliefsupplies,raisedalmost$2millionfortheAmericanRedCrossandcontributed $788,000totheFamilyFundtoprovideemergencyassistancetoteammembers. 2018ProxyStatement | 45 2.17.2 Executive summary The CD&A in the proxy is one of the most highly read sections. Most companies include executive summaries at the beginning of the CD&A, as for some companies the CD&A has been growing in length. Here, investors are afforded insight into the board’s thinking, including not only the “what” but also the “why” of compensation decisions. To the extent executive pay is designed to support company strategy, where that strategy is evolving, it makes sense to also present corresponding changes to the compensation program in an easily located sub-section.

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