At Southwest, the Culture Drives Success

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One of themes of my book is that in any large organization, you have to have greater leaders at every level. The reality is, when you have 30,000 employees spread out all across the country, most of those employees are never going to meet the CEO. They'll probably never read the company's mission statement. If they don't see the kind of culture that you want to exist in your organization, if they don't see it right there on their shift and in their workforce, if they don't see leadership from their leaders right there, they're going to think all that other stuff is just a bunch of corporate propaganda, just a bunch of b.s.

So how do you reach those people?

Unfortunately, frontline leadership, which is in many ways the most important level of leadership, is the area where a lot of companies fall apart. When they think about leadership training, what they're usually thinking about is executives who might be a vice-president or CEO someday. They don't put as much effort into training those frontline leaders, which is where a company most directly touches its customers and its employees.

Another thing employees look at is executive compensation. How did you handle that?

I took pride in being the lowest-paid CEO in the airline industry. I always thought it was hypocritical to be preaching frugality to the employees, which was of course very important to the business strategy, especially after 9/11, if you were practicing profligacy in the executive suite.

How did you structure it so that you were still rewarded but it didn't appear to be out of line?

People think that because Southwest is a low-fare, low-cost airline, it must be a low-wage operation. Nothing could be further from the truth. Actually, Southwest is the most heavily unionized airline in America. Because we put a premium on never making a promise we didn't keep to our employees, we didn't ask our employees to take pay cuts after 9/11. The only people who did so were the officers of the company, who did so voluntarily.

When all the other airlines started cutting back on employee pay, Southwest turned out to be the highest-paying airline in America. We dedicate a higher percentage of revenues to employee compensation than any other airline. Yet Southwest has the lowest overall cost structure. Obviously you have to have a lot of dedicated, motivated employees to achieve that.

Did all Southwest employees get stock options?

While I was CEO, we gave stock options to every employee at every level, contract or noncontract, from the CEO to the guys who cleaned the bathrooms. There is an element of ownership that goes into this ownership mentality that I like to talk about. It's not the only thing. You can have people who have a financial interest in the company, but don't feel like owners, as happened at United Air Lines when they had their employee ownership period.

How was that different from the Southwest experience? At United, they did have an employee stock ownership program and employees actually owned the airline.

They did own the airline, yes. But the problem was they were never able to break down that culture of conflict. They still had pilots thinking like pilots, and mechanics thinking like mechanics, and managers thinking like managers. They never shared a common feeling of mission. They never created a culture where they had an ownership mentality.

In addition to writing Armchair MBA for BusinessWeek.com, William J. Holstein writes for The New York Times, Fortune, Corporate Board Member, Dealmaker, and Strategy + Business.