Kelleher on Compensation: Pay Executives Less and Employees More

Southwest has achieved some extraordinary things in the area of employee relationships. Its pilots, for example, agreed to freeze their salaries for 5 years, taking their chances with stock options instead. When another employee group, which had effectively voted itself out of a union a few years earlier, began feeling vulnerable, Kelleher responded by issuing a personal contract—signed by Kelleher himself—to each of those employees.

These unconventional practices would be impossible without a foundation of trust and fairness. Kelleher says that his brand of culture would not be possible without a fair compensation system up and down the organization. He says that while he pays employees above-average salaries, he pays officers less than their counterparts at competing carriers:

Our officers (whom I consider the best in the business) are paid 30 percent less, on average, than their counterparts....On the other hand, most of our employees are at or above average pay levels in our industry. We try to make up that difference to our officers with stock options, but of course that depends on how well the company does.

The company also allows all employees to participate in a generous profit-sharing plan. Kelleher feels that giving employees a stake in the company is smart business and helps boost productivity. And there is ample evidence that these unconventional compensation practices work:Southwest is the fourth-largest airline in America (a $6 billion organization that has achieved three consecutive decades of profit). It flies 50 million passengers per year, and it has won the coveted "Triple Crown" (best monthly on-time record, best baggage handling, and fewest customer complaints) an unparalleled 32 times.