Boeing’s ongoing CEO search led to a $150M-plus potential payday for Carrier chief

Following the infamous door-plug blowout on Air Alaska flight 1282 on January 5, the Boeing board tore up its succession plan. Only three weeks earlier, Boeing had announced that Stephanie Pope, who'd served as CFO at both the Global Services and Commercial Airplanes divisions, and then headed the former unit for the previous fifteen months, would ascend to chief operating officer on January 1. The promotion clearly marked Pope as heir apparent to current CEO David Calhoun, the 67-year old GE veteran who'd championed her as the best choice for his successor.

But the disaster at 16,000 feet over Portland delivered a shattering shock that reduced Calhoun's clout and gave the board second thoughts on succession. On March 25, Boeing announced that Calhoun would depart as CEO by year end, and that former Continental Airlines chief Larry Kellner would step down as chairman, replaced by Steve Mollenkopf, retired CEO of Qualcomm and a Boeing director since 2020. The board fired the head of the troubled Commercial Airplanes unit that produces the 737 Max and 787 Dreamliner series, and put Pope in charge, adding to her role as COO.

Calhoun's still backing Pope to lead Boeing, as he stated on April 29, both on CNBC and during Boeing's earnings call that day. But under the leadership of Mollenkopf, an engineer who acquired a deep understanding of production processes on the fab floors at Qualcomm, and who's spearheading the search, the Boeing board now favors another brand of leader. Not a financial specialist like Pope but a seasoned manufacturing ace who masters airplane building from nose cone to rudders, and harbors the expertise to install safeguards ensuring the highest caliber wrench-turning, riveting and shimming required to restore the Boeing's now severely tarnished reputation for quality and safety. The directors reckon that Boeing needs a radical change agent who'll transform the broken culture that's keeping the planemaker from regaining its place among the world's greatest manufacturers.

By mid-January, according to my sources, the board had decisively switched to favoring an outsider featuring strong experience in making the most challenging in technologically complex products, including in aerospace. The leading candidate was Dave Gitlin, CEO of Carrier Global, the heating, ventilation and AC giant, and a Boeing director since mid-2022. Gitlin boasted a superb resume for the job. He'd spent 23 years at United Technologies Corp., including stints as president of UTC Aerospace Systems and Collins Aerospace respectively, gaining a solid grounding in the output of everything from avionics to landing gear to aircraft wheels and brakes. When UTC spun out its Carrier unit in the spring of 2020, it chose rising star Gitlin to run the newly-independent enterprise.

At Carrier, he's arguably proven America's most successful industrial leader for rewarding shareholders. In four years at the controls, Gitlin's multiplied Carrier's market cap from around $12 billion to $58 billion and delivered annualized total returns of roughly 50%. During that span, Carrier's stock has outperformed the shares of Microsoft, Apple, Alphabet and every other member of the Magnificent Seven save Nvidia. Spotlighting Gitlin's prowess is Carrier's performance under COROA, or "cash operating return on assets." Developed by accounting specialist Jack Ciesielski, COROA measures the cash companies generate for each dollar still invested in the business. From 2022 to 2023, Carrier increased its adjusted asset base by $3.3 billion, and made an additional almost $1 billion in "operating cash flows" (a measure that includes cash paid for interest and taxes) on those newly added resources, for a return of 30%.

Hence, Gitlin's proven his worth as a excellent general manager, in addition to harboring deep expertise in aerospace.

Gitlin says no to Boeing, and captures a huge reward from Carrier for staying on

Prior to the current crisis, you'd hear occasional talk that Gitlin might succeed Calhoun, including speculation from Reddit bloggers and infrequently, securities analysts. But after the January 5 cataclysm, the view that the board would pick a newcomer took hold, and Wall Street and the business press buzzed that Gitlin appeared the ideal choice. Picking a CEO from the company's board is a time-honored solution—especially for repairing a player in crisis.

The advantage: the director's already steeped in the company's finances and operations, and really knows what he or she would be getting into. Calhoun had been a board member when he followed Dennis Muilenburg, who was fired in the wake of the two 737 Max crashes in late 2018 and early 2019 that killed 346 passengers and crew. Likewise, GE had plucked Larry Culp from its roster of directors in 2018, and he'd done a spectacular job reviving the then-failing jet engine, power and healthcare conglomerate. At age 54, director Gitlin not only knew Boeing intimately, he had a runway of a decade or more at the controls, a span long enough to bridge overseeing the development of its first all-new plane in decades.

But on Carrier's Q1 earnings call, Gitlin silenced all the chatter about a move to Boeing. In response to an analyst's question, he declared, "I've removed my name from consideration as a potential CEO of Boeing. I'm staying put, 100% committed to Carrier. We're in the early innings of what...will go down as one of the biggest transformations ever, and I'm so excited to be on a journey with 70,000 or so of the team members at Carrier."

So what happened?

Gitlin's declaration that "I've removed my name..." implies that at the very least, Boeing showed interest in hiring Gitlin. My sources also confirm that Gitlin mulled considering the opportunity. The Carrier board apparently took notice in a big way. On January 30, four weeks after the close of a year when Gitlin had already received a long-term incentive award targeted at $11.15 million, Carrier issued an 8K filing that unveiled a lucrative new "supplemental equity award" or "rentention" package fashioned to keep him in Palm Beach Gardens, Fla. running the HVAC-maker—and take a move to Boeing off the table. The 8K characterized Gitlin's continued leadership as critical, since he's in the midst of a "pivotal moment" in recasting Carrier's product portfolio, a recasting that includes the recent $13 billion purchase of German heat pump-maker Viessmann Climate Solutions, and the sale of its fire security and commercial refrigeration arms, all moves designed to refocus on highest growth and margin segments.

Carrier also nodded to the outside interest that prompted the big award, undoubtedly a response to the Boeing's overtures and their concerns that the opportunity might entice their coveted CEO. "The Board considered the extremely competitive market by direct peers and broader industrial companies for...high profile CEOs such as Mr. Gitlin," the filing stated. "Mr. Gitlin's market attractiveness is further heightened through a very successful period for Carrier."

Carrier declined to comment on Boeing's CEO search.

Gitlin's package is big, but he'll have to deliver and stay at Carrier for years to collect

As the 8K discloses, Gitlin's getting a single "supplemental equity" award that comes in two parts. The first component: A "target" grant of 446,110 performance share units. The actual number of PSUs he'll receive hinges on achieving increases in adjusted EPS from 2024 to 2026 that are not specified in the 8K, though in its proxy Carrier calls its EPS goals "rigorous" benchmarks" that are "stretch but attainable [targets]." If Gitlin achieves the highest EPS metrics, he gets a maximum of double the target number, or almost 900,000 PSUs.

The second category: 1.725 million stock appreciation rights with a strike price of $56.33, where Carrier's shares closed the day the 8K appeared. No performance requirements for receiving the SARs are disclosed in the filings. Overall, the package is designed to ensure that Gitlin stays at Carrier for a long time. The PSUs vest from 2027 to 2029 and the SARs vest all at once in 2029. If Gitlin leaves before the end of 2029, he'd sacrifice all but a relatively small portion of the grants.

Fortune has learned from outside sources that Carrier valued the award at $50 million as of the January 30 issue date, when its stock closed at $56.33. Since then, its shares have risen 16%, already making the package a lot more valuable. Let's tally how much Carrier could be paying, over the life of the plan, to retain its redoubtable helmsman. Keep in mind that Gitlin must keep performing well to get anywhere near the maximum payout.

If Gitlin achieves the top EPS metric, he'd garner those almost 900,000 PSUs, or double the target. Substantially raising earnings means the stock price would flourish. Let's say Gitlin lifts Carrier's shares by 10% annually over the six year span he's basically committed to. That record would hoist Carrier's stock to $116, a 77% increase. His PSUs would then be worth roughly $100 million. What about the SARs? At $116 a share in 2029, they'd harvest an additional $100 million or so (the 1.725 SARs at a gain of $61 each over the strike price of $56).

Hence, the potential payout for keeping Gitlin at Carrier could easily reach $200 million. Experts I spoke to regard this retention arrangement as extremely generous, but hardly over-the-top. It's also a good move, since even the top payment would equal a fraction of the value Gitlin's added for Carrier's shareholders, and as the board logically reasons, the deal's a fair trade versus what he could contribute over the next six years.

What Gitlin's gambit may be telling us about the Boeing job

On the one hand, the Boeing CEO job, at least in good times, towers as one of the most prestigious positions in global business. In the years to come, any figure who can restore the fortunes of this fabled manufacturer would rank in the pantheon of business leaders for this half-century.

But in sundry other ways, the Boeing post, at least right now, looks highly undesirable to prestigious candidates. The Gitlin experience is revealing. Boeing's financial performance is now so poor that even a turnaround wouldn't guarantee that a new CEO delivers the results needed to pocket a huge long-term comp windfall of the size Gitlin's likely to receive at Carrier. What's more, a Boeing CEO always has to worry that a Boeing plane will suffer a new accident like the explosion over Portland, or God forbid, a fatal crash. The cause could be parts or systems made years ago that the new CEO had nothing to do with.

Put simply, the Boeing CEO job is a hard-sell for its board. Top leaders who were at one time possible candidates in the eyes of the directors, including Dave Gitlin, Larry Culp and chairman Steve Mollenkopf, haven't warmed to a task that's critical to the future of the airlines and the flying public. Of course, Gitlin and Culp were already heading highly successful companies, and Mollenkopf had established an excellent record at Qualcomm. Yet the job's daunting risks may be a reason that so far, the top talent keeps saying "no." My sources also note that the pool of top promising candidates is surprisingly shallow. Hopefully, the opportunity of turning around what's arguably America's most important company, and be remembered as a corporate hero, will prove irresistible to leader who will display the greatness that will once again lift Boeing to glory.

This story was originally featured on Fortune.com