The Frequent-Flier Dilemna: Should the Employer or the Employee Be the Beneficiary of These Programs?

Paul Lansing Neal P. Goldman

ABSTRACT. In the following discussion, we address the ethical dilemma of who should benefit from the many frequent-flier programs used by airlines. The issue of central concern involves whether the employer or employee are acting unethically when either of them choose to be the beneficiary from frequent-flier programs. Once this issue is decided, we then determine if the benefits outweigh the costs for the employer that either keeps the miles or, decides to let their employees enjoy them.

Introduction

In an attempt to streamline inflated travel expense accounts, companies have generated several different solutions in order to resolve this problem. Ideas range from re-evaluating the company, or its agent, who purchases the ticket for corporate travel, to deciding who should be the beneficiary of any amenities included in the price of a ticket. One amenity that has been in controversy is the "points" awarded under the many frequent-flier programs that exist throughout the airline industry. In the following discussion, we address the ethical dilemma of who should benefit from the frequent-flier programs used by airlines. The issue of central

Paul Lansing is a Professor of Business Administration at the University of Illinois at Urbana-Champaign. He received a J.D. degree and a graduate degree in inter- national business.

Neal P. Goldman received his B.A. ('91) and his M.B.A. ('93). Neal worked as a consultant before joining Arthur Andersen LLP in 1993. Currently, he is working in the Valuation Services Group within the Tax Division of the Chicago office. Neal specializes in the valuation of closely held businesses.

concern involves whether the employer or employee are acting unethically when either of them choose to be the beneficiary from frequent- flier programs. Once this issue is decided, it is then necessary to determine if the benefits outweigh the costs for the employer that either keeps the miles or, decides to let their employees enjoy them.

The first frequent-fl ier programs

Since American Airlines introduced the first frequent-flier program in 1981, an estimated twenty-two million people have joined approx- imately forty programs world-wide, earning over 950 billion miles of credit. 1 The programs target 17.3 million business travelers who account for 66% of the $32 billion in passenger revenues earned by domestic airlines. 2

The original strategy of the frequent-flier programs was to build up brand loyalty among airline customers and increase market share by making it too costly for their participants to choose other programs. Today, the programs have been used as an additional cost shifting tool, attempting to replace fare cuts in times of dire competition. The programs have become a form of "off-balance sheet financing," allowing the airlines to postpone an ambiguous liability into the future. However, installation of these programs, along with vicious price wars, have led to the demise of several of the original plan carriers.

Journal of Business Ethics 15: 661-670, 1996. © 1996 Kluwer Academic Publishers. Printed in the Netherlands.

662 P. Lansing and IV. P. Goldman

Background

Before frequent-flier programs came into exis- tence, employees primarily chose an airline based on (1) the price of the ticket (2) the reliability of the arrival and departure times and, (3) the convenience of the schedules. However, with the genesis of frequent-flier programs, another major factor was taken into consideration: the number of miles earned toward an award bonus. In general, mileage programs award "points" to a passenger for each trip taken. The points are accumulated and monitored under the individual passenger's name. Airlines encourage people to join their frequent-flier programs with no enroll- ment or annual fees, initiation rewards of bonus points, and crediting member accounts with mileage earned by flying on the airline or its designated partners. Many programs credit more miles, usually twenty-five percent to fifty percent, when a passenger flier business or first class. Mileage credits can also be earned by staying at designated hotels, renting cars from participating agencies, taking ocean cruises, and even by making purchases with credit cards.

Once an individual accumulates a sufficient number of miles, typically 20 000, he or she can then exchange the points for one of many dif- ferent types of awards. In most cases, the award certificates can be transferred to family members and/or friends. The most common award is a free flight anywhere in the United States or an upgrade into business or first class on overseas flights. However, recently awards have become much more exotic. Examples now include hotel accommodations, car rentals, cruises, crystal decanters, books, luggage, pets, plant tours of airline manufacturers, time on flight simulators, and even discounts on stock purchases. 3

As the popularity of these programs increases, so does the number and variety of companies involved in the process. Today nearly every major airline in the business has some type of frequent- flier program in place. In addition, so do most hotel chains and car rental agencies. In the telecommunications industry, both Sprint and MCI Communicat ion have joint ventures with certain airlines in order to give mileage credit based on the number and length of long distance

calls a customer makes each month. Even the financial services companies participate. Visa and Master Card have teamed up with Citibank and American Airlines in order to offer customers mileage awards for making purchases on their sponsored credit card accounts.

Furthermore, all these expensive transactions occur outside of the Internal Revenue Service's reach. Currently, there is no income tax on the so called "earnings" and no sales tax on the "purchase." The programs have become a tremendous success in the eyes of customers and have shown enormous growth over the past several years.

The Issue: Who owns the mileage awards accumulated: The employer-purchaser or the employee-traveler?

Frequent-flier programs allow the airlines to build their brand loyalty and increase repeat business among their customers, while at the same time allow customers to receive benefits for their exhaustive traveling in the form of lower prices from competit ion, free future trips, upgrades and/or other gifts as discussed earlier. However, many employers feel that because they pay the expense o f business travel, they are entitled to the reward that the airlines provide for frequent patronage. On the other hand, employees have a different view. They argue that the mileage points are just another benefit provided for the passenger who actually does the traveling. They claim if the airlines wanted the benefit to go to the employer, instead of giving mileage points away, they would just lower the price of tickets.

In attempting to determine who the true beneficiary should be, Runzheimer International, a travel consulting firm, took a survey among 1085 travel managers and asked who they believed should receive the frequent-flier miles rewarded. The 1984 survey showed that 38 percent of the managers said the frequent-flier bonuses belonged to the employer. 4 However, when the same survey was repeated in 1990, 1Kunzheimer reported that this figure had declined to 12 percent. In 1991, they went back

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to these same employers and found that only 10% of the them, with one to fifty frequent travelers, actually did claim the frequent-flier awards. But, this number increased to 48% for companies with more than 500 frequent travelers, s In retrospect, the Runzhe imer study found that larger employers are more likely to claim frequent-flier awards than the smaller ones. They hypothesize that this is due to the high cost of monitor ing frequent-flier mileage, which can be more easily borne by larger organizations.

The employer's view

In another study, business travelers were asked, "If frequent-flier bonus tickets were considered free employee benefits, how important would a mileage program be to you when choosing an airline?" 62 percent said very important or important. 6 However, when asked, "If frequent- flier bonus tickets were considered company property, how important would a mileage program be to you when choosing an airline?" the figure dropped to 8 percent. Employers seem to have a strong argument that they have a right to be indemnified for the benefit received by their employees. It is the employer that purchases the ticket and therefore, owns the property or the right to its use. The employee is only acting as an agent for the employer and therefore has no legal and/or ethical right to keep the benefits of the ticket unless granted by his or her employer. The employee is being paid to serve the employer and therefore, should not take or steal any amenities that are provided to him or her in the name of their employer.

The employee's view

However, the employee also has justification for claiming the right to use the benefits that the airlines provide. Business trips today are often regarded as long, tedious, and exhausting due to the added stress that they bring to the everyday work schedule. Employees tend to view traveling as far from glamorous, and many of them feel that all benefits provided from the flight should

be counted as compensation for being away from their family, friends, and home. Many employees feel that the frequent-flier miles earned on business travel are their property, analogous to a meal or drink that are provided on the plane. In the past, employers have never asked employees to reimburse them for food, beverage, or any other perk that the airlines provided with the purchase of a ticket. Therefore, the miles seem to merely be another benefit provided by the airline. Employees argue that if employers wish to remain consistent with their actions of the past, they should not feel privileged to repossess the bonus coupons.

A further argument that employees make regarding their right to benefit from frequent- flier miles stems from the current rules of the system. Because airlines do not allow people to have separate corporate frequent-flier accounts (except Japan Airlines and Alaska Airways), it is difficult if not impossible, for employees to separate personal travel miles earned from business travel miles. To add to this problem, as we stated before, personal miles not only accu- mulate from airplane travel but also from charging goods on credit cards, making long- distance phone calls, and staying hotels. It seems very unfair for the employer to receive the full benefits from the personal miles that are accu- mulated in these programs.

A final argument that employees make regarding the ownership of these miles takes into consideration the way the Internal Revenue Service (IRS) and the Financial Accounting Standards Board (FASB) value these miles. Before June 1993, the tax rules regarding frequent-flier miles were very ambigious. However, in June, the IRS took its first step in clearing the ambi- guity regarding the proper reporting procedure. IRS private letter ruling 9340007 told an unidentified airline that it was not necessary to report the frequent-flier benefits it provides to its customers. This was an important action because before this ruling, the IRS claimed the reward of a free flight as income, and the exchange, as a sale. However, in the past, although they said it was i n come] they chose not to inforce the collection of the income or sales tax generated from the transaction due to the complexity of

664 P. Lansing and N. P. Goldman

valuing such a benefit. Section 6041 of the Internal Revenue Code requires information reporting for payments of $600 or more, but only if the payment is of a fixed or determinable amount. In IRS private letter ruling 934007, the IRS admited that the frequent-flier benefits are not fixed and determinable, and therefore, the airline does not have to file information returns. Many employees feel that since the IRS does not see the mileage points as taxable income, that they should not have to give up this "unknown value" benefit.

Richard H. Deane did a study on 625 randomly selected business travelers and found that 95% of those surveyed personally received the frequent-flier points from travel that was paid for by their employer. 8 Also, 80% of these people admitted that frequent-flier membership is at least sometimes a factor in choosing travel services and only 25% of the respondents agreed with the proposition that frequent-flier programs present ethical issues to business travelers. The fact that 75% of the people surveyed do not even see an ethical dilemma further emphasizes employee feelings regarding their right to the ownership of these points.

An ethical analysis

In order to establish whether either of the parties involved in this dilemma have an ethically correct action to follow, the first step is to see who is hurt and who benefits from the current actions taken. When employers collect mileage points from their employees, they are the sole benefi- ciary. They get to use the flee flights which reduces the overall company Travel and Entertainment expenses. At the same time though, the employee is hurt both quantita- tively and qualitatively. Financially, the employee will not be able to pay for his or her next vacation with the mileage points. This could have a value anywhere from $100 to $1000 dollars per ticket. Perhaps even more importantly though, the employee's morale weakens because he or she feels that something earned is wrongly being taken away. Furthermore, the financial value of the free ticket is worth 30 to 40 percent more

to the employee because he or she has to purchase non-business tickets with after tax income. The employer, on the other hand, can expense the purchase price of a ticket, and then lower taxable income in the process. However, if the employer choses to use an awarded "free ticket" for business purposes, the employer loses the value of the tax shield created from the expenditure.

On the other hand, if the employer grants the employee permission to keep the miles earned through his or her travels, then the employer incurs a pecuniary loss and the employee receives a financial gain. This time, however, the employer loses solely the price o f a ticket and "company morale" is not affected. The employee gains the price of a ticket and possibly even some good-will towards the employer for allowing the action to take place. From this analysis, it is clear that the employer's loss is smaller than the employee's loss if adverse actions are taken for either side, while the benfits are equal. Ethically then, the right answer might be to allow the employee's to keep the mileage points.

The problem with h o w a carrier is chosen

Another way to think about who the owner or beneficiary of the bonus points ought to be is to consider how a particular flight carrier is chosen. In the air transportation industry, all the com- petitors offer a product that is almost exact to one another. They charge nearly the same prices for tickets, serve the same quality food, have relatively the same odds of arriving and leaving on-time, and take the customers to the same places all over the world. Basically, the only variables left for customers to distinguish which carrier to choose from are advertising and the amount of frequent-flier mileage the customer will receive in travel. In a survey of 520 travel agents nationwide, the General Accounting Office (GAO) found that 57 percent said their business clients "always or almost always" choose flights on the basis o f frequent-flier programs. 9 An additional 24 percent of them said that their clients do so "more than half the time."

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From this study it seems evident that the frequent-flier programs not only have a strong impact on the decisions of employees but, they also have an effect on the employer. The problem arises because employees are no longer concerned with the cheapest and most direct route in choosing which airline to fly, but rather, they are concerned with which frequent-flier club they belong to and how many more miles they need to receive a free ticket. An industry survey found that 25% of corporate frequent-fliers polled admitted that they took unnecessary trips just to earn mileage points for their accounts. 1°

The frequent-f l ier program: An agency di lemna

The main cause of the frequent-flier problem seems to be tied back to the way the system is set-up for the employer to purchase its tickets. Employee abuse of frequent-flier benefits repre- sent what in management theory is called the principal-agent problem, where the principal is the paying employer and the agent is the buying employee. 1l Although the agent has a fiduciary duty to act in his master's best interest, because there is no cost to the agent in purchasing the ticket, he or she may make sub-optimal travel decisions for the principal. These decisions can come in the form of not purchasing the least expensive ticket, to flying an airline that makes several stops in order to pick up more miles toward a bonus account. The agency problem arises when the desires and goals of a principal and an agent conflict, and it is difficult or expen- sive for the principal to moni tor the agent's activity) 2

The salient assumptions of agency theory for the frequent-flier issue are: (1) people act in their on self interest; (2) there is goal conflict among organizational members; and (3) information (a purchasable commodity) is a key element of control. 13 To expand on each of the above points, employees will tend to act in their own self interest. Examples of this include employees attempting to maximize the number of miles on their frequent-flier accounts by traveling cir- cuitous routes, changing planes to increase flight

"legs," and engaging in other activities that increase the mileage payout. For the agent, these activities also incur costs through personal inconvenience and discomfort.

However, at some point the costs will balance and then exceed the benefits and the agent will stabilize his activities at the former level. Unfortunately for the principal, the agents activities up to that point may incur high direct costs through increased airfares and lost produc- tivity. TM

As for the goal conflict, the principal's goal is to transfer his employee to the required destina- tion as cheaply and as efficiently as possible, taking into consideration both the price of the ticket and the amount of time that the employee is using in the actual travel. The employee's goal, on the other hand, is to travel both comfortably and conveniently and at the same time to build up some frequent-flier mileage points so that he or she can earn a free trip or other reward in the future.

The information and control aspect of the agency dilemma is also a severe problem for both the principals and the agents. The majority of the programs do not allow employers to have their own frequent-flier accounts and therefore, the principal must moni tor as many individual accounts as there are travelers in the organiza- tion. Airline reasoning for not allowing people to have two frequent-flier accounts is two-fold. First, some airlines claim that the beneficiary of the frequent-flier programs is supposed to be the passenger who is flying on the plane, and not the person or entity that purchases the ticket. Others fear that allowing people to have separate corporate accounts will give corporations too much bargaining power in deciding the price of a ticket. Also, airlines realize that employers would monitor their miles more closely and use the free flights without much delay. This more efficient use of the mileage would increase the present value of the liability to the airlines.

The solution to the agency problem is two- fold. First of all, the principal has to determine whether the benefits outweigh the costs of installing a strong information management system, or just letting the employees keep their bonuses. Most likely, the larger employers may

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find it worth their while to install a MIS system that allows the corporation to track its employees' travels and then collect the bonuses as they are granted by the airline. However, we think that the smaller employers will find that the cost of installing such a system and moni tor ing their employees' travels will outweigh the pecuniary benefits received from the airlines. At the same time, the employer may also hurt its good-will by taking the mileage away, which will have a negative affect on employee morale. Another possible solution to the agency problem involves making the principal and agent's interests analo- gous. If the employee were somehow rewarded for keeping his travel cost to a minimum, then maybe, the principal and agent would collabo- rate and both be the beneficiaries over the long-run. One way for companies to do this is by surveying their employees' and acquiring feedback on what they believe would be a salient award for those who operate in a cost efficient manner. The answers could include t ime-off before holidays, cash awards, or recognition in front of senior management.

The frequent-f l ier di lemna: Analogous to a bribe

A final way of looking at the ethical dilemma that the employee is put in is to see the frequent- flier programs as a bribe. ~s If a vendor were to offer a purchasing agent for an organization a free trip to Hawaii with his wife if he purchased certain necessary goods for his company, his actions would be not only unethical, but also criminal. There have been numerous criminal convictions of both purchasing agent and vendors for fraud and misrepresentation when actions similar to the one stated above were performed. However, the offer of a bribe to a purchasing agent has striking similarities to the frequent-flier programs operated by most airlines.

Frequent-flier programs present an ethical dilemma for the employee because the individual selecting the vendor (and receiving the frequent- flier benefits) is most often an employee while the travel payment is most often made by the employer. .6 These programs can generate a

conflict o f interest, similar to the vendor's solicitation of a bribe to a company purchasing agent. The employee, in a sense, is forced to decide which airline to fly based on the size of this bribe. This is not a form of price competi- tion because the employee is not as concerned about the price of the ticket purchased, but rather, the size of the reward for using a specific airline. As we stated earlier, because there is little difference in the product and/or service that the airlines provide, the deciding factor on which airline to fly often comes down to the size of the "bribe" that the airlines decide to offer. The frequent-flier programs have become an impor- tant component in differentiating airlines, and therefore, have led to this possible misuse by both parties involved in the decision. The bribery issue can be resolved by having a third independent party, such as a designated travel agency, select the flight based solely on the price of the ticket. Or, if travel expense is large enough, companies can create their own "in-house" travel depart- ment. Therefore, employers will still receive the lowest priced tickets, if this is their concern, and employees will receive the award without any input in the decision. In retrospect, the points are no longer a bribe due to the fact that they are rewarded after the purchase to an employee not involved in the decision making process.

Employer's response

Employer's have responded in a variety of ways to the frequent-flier problem. Many employers vigorously deny that their pockets are being picked by high-flying employees. By booking their employees at the lowest convenient fare and not by airline, and also by keeping a record of mileage points earned by them, many employers feel abuse is kept to a minimum. Other employers now use solely one travel agency in each area of the country instead of the many different ones that each of its independent offices or divisions used to use. These select agencies give company travel coordinators detailed reports on bookings and mileage points and advise the employer of all pending award certificates, which then become property of the employer.

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Other employers feel even stronger about monitoring their employees and have created a corporate postal box which is to be used for all frequent-flier accounts. Harry Versen of Texaco says, "not using the payoff from company paid trips for business is like not sharing the prize in a lottery with the guy who bought the ticket. ''iv When free trips are earned, employees must use them for business travel.

Some employers like Boeing feel that an aggressive approach works best in their organi- zation. Boeing tracks more than 20000 employees accounting for 130000 business related airline reservations in 1990 alone) 8 If the company detects that an employee is making more than a certain number of trips on the same airline in a given year, the employee is "asked" to join the airlines frequent-flier program. All such employees must give Boeings corporate address for mileage plan statements. Boeing Travel Services monitors all individual accounts and when an employee reaches an award level, the company asks him or her to sign offthe accu- mulated mileage for free tickets to be used for future business trips. This program may sound like it is the most cost efficient, however, it is important to remember that all costs that a program like this entail can not be incorporated into actual accounting numbers. There exist other costs such as a loss of employee morale due to the belief that their employer does not trust them, or that the employer is taking a piece of property away from them which they truly believe to be theirs.

Other employers merely suggest that employees turn in their free trips after they accumulate enough miles. Ford, Pillsbury, and Texas Commerce Bank still try but concede the honor system is not foolproof. 19 Ronald Woesteneyer, president of Seabrook Marketing Inc. in Houston, says " the real target is cost reduction and the trend is away from trying to recapture the awards. ''2° Instead, employers are zeroing in on the added expense frequent-fliers often incur by crafting itineraries to maximize their mileage.

Other employers choose a more moderate approach in dealing with frequent-flier miles. As Robert H. Miller, a senior vice-president at Visa

International says, "as long as using frequent-flier programs don't cost us anything, it's OK. ''21 What he means by this, is that it is all right to allow the employees to keep the frequent-flier miles they earn through company travel, as long as, they do not abuse the system. To enforce such a policy, employees at Visa, Connecticut General, Aetna Life and Casualty, and Time Warner's cable unit name their destination to the company but cannot pick their airline. They are then allowed to keep the points.

Still another solution that some employers are using to help solve the problem takes a value laden stance. Some companies, such as Unisys, have a voluntary program with cash incentives. Under the program, an employee who earns a free ticket while flying on company business is encouraged to use it on a future business trip in return for a cash payment equal to half the amount the ticket would have cost. Unisys reports that this saves the company half of a million dollars in annual travel c o s t s . 22

Not all employers feel that the awards should be taken away. In another Runzheimer Inter- national survey of over 1000 companies, the frequent-flier problem was cited as the third most pressing in travel management, after confusing air fares and high cost of travel. 23 At the same time though, only 38 percent of them said they con- sidered mileage awards earned by employees to be company property; 62 percent looked at them as employee benefits; and 2/3 of the companies permitted travelers to book their own flights and to keep any prizes as long as they were "within reason." There are a few large employers that take a soft approach and allow their employees to keep the mileage awards they earn from their travels. AT&T is one of the employers that believe the hassle and trouble of monitoring a system far outweight the benefits to be received from it. It seems for the smaller employers that the benefits received from monitoring employee travel mileage accounts will almost never outweigh the time, morale, and pecuniary cost that the company will face. For larger organizations, the accounting numbers may say the miles are worth the investment to monitor employees, however, the fear of "big brother" watching employees may have a negative effect on overall long-run

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employee productivity and morale that quantita- tively can not easily be calculated.

The valuation of frequent-flier awards

In order to consider whether companies should attempt to retrieve the mileage bonuses from their employees, it seems important to establish the actual value of the rewards or liability to the airlines. Looking at the financial statements o f most major airlines, one may come to the con- clusion that the rewards are not worth anything. The Financial Account ing Standards Board (FASB) and the Securities and Exchange Commision (SEC) require the airlines to make a footnote o f the liability, however, they do not show up on the actual balance sheet. There have been many analysts, companies, and government agencies that have at tempted to measure the liability, but all o f them base their answers on broad assumptions. One 1991 calculation esti- mates that the industry as a whole owes its customers over 950 billion mileage credits. 24 If all these miles could be cashed in, members would receive the equivalent o f 47.5 million free continental U.S. round trips. 2s Business Flyer's Holland, on the other hand, suggests a more modest liability of 35 billion miles (1.75 million round-trips), but further states the other impor- tant part o f the equation is how much a mile is worth. 26 The question o f how much a mile is worth is so complex that even the Internal Revenue Service gave up trying to value it and decided that the tax revenue is not worth the aggravation in trying to figure out what is being earned and sold. 27 The IRS has publicly announced that frequent-flier miles, earned on business trips but applied to personal use, are a taxable fringe benefit, however, they have not been able to collect the tax due to the com- plexity of the valuation as discussed earlier.

Again, there have been many estimates to determine the size o f this liability over the past several years. One estimate from the Wall Street Journal showed the figure at $1.25 billion in 1988. 28 Another 1989 estimate put the figure at four million round-tr ip domestic tickets worth about $1.24 billion at any one time. 29 Whatever

the size o f the liability is, it is a prodigious figure and it is continuing to grow. No airlines will divulge how many unclaimed miles have been accrued, how many have been redeemed, or precisely how they choose to value the miles. However, this is not surprising because in a sense what they are asking for is the best o f both worlds. Airlines want their customers to put a high value on the free trips, and at the same time they want their creditors to put a low value on these "incidental expenses."

If one chooses to rely on the public accounting industry to determine this valuation, unfortunately the results fair not much better than the IRS's attempt. U p o n request from the Securities and Exchange Commision, the American Institute o f Certified Public Accountants conducted a two year analysis aimed at formulating more precise accounting standards for frequent-flier liability treatment. The com- mittee originally proposed to differ some of the revenues to be used to cover the deferred cost o f free flights at the redemption time. However, due to difficulties with the cost o f free flight assessments, the analysis later switched to the current incremental cost basis. After must debate and frustration, the project was eventually dropped wi thout reaching any conclusion in September 1990.

Proposal

Our proposal begins from the actions the airlines are currently taking to eliminate this "non liability." Recently, the airlines have modified the frequent-flier program rules, hoping to reduce their liability before customers have a chance to realize what has happened. Many airlines now have set limitations on the amount of time one can accumulate mileage in an account. After a few years, miles will expire, and customers will have to start the process all over again if they fail to make a claim before the deadline. What we are starting to realize is that maybe it is more important to look at the value o f the free ticket from the employer's point o f view, rather than from the view of the accountants, analysts, and government agencies. Most airlines have certain

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blackout periods for frequent-flier travelers, and allow for only a minimum number of their seats on any one flight to be used for frequent-flier travel. These seats are often booked months in advance due to their popularity. They require an adequate amount ofpre-reservation time in order to fill out the proper request forms to receive the certificate from the airline and then to exchange for the actual plane ticket itself. It seems employers have a lot more difficulty planning travel events far in the future and making reservations on flights with long notice. With the rules of the programs as they now stand, the. free ticket coupons seem to be a more valuable com- modity to the employee, who has the capability of planning personal time well in advance on his or her schedule.

Our position regarding the rightful beneficiary of the frequent-flier programs is to let employees keep the miles earned during business travel. After interviewing several employees who wished to remain anonymous and who work for employers who take the miles away, we found that this action often creates a hostility toward the company that decreases the comraderic atmosphere that should be present in a benevo- lent work environment. We feel the bonus miles an employee earns while traveling on an airline are one of the benefits that come along with the ticket, such as dinner, drinks, movies, a deck of cards, magazines, newspapers, slippers, or anything else. These are all items that are included in the price of the ticket, and therefore, should become the property of the employee doing the traveling.

Instead of thinking of the employee in legal terms as an agent for the principal, it would behoove the employer to think of its employees as people in a large family. If the principal (employer) and agent (employee) break down the adversary barriers that exist between them, and instead collaborate and work together, then maybe, productivity and efficiency will increase and the two will not waste time monitoring each other. If employers were to set guidelines that required employees to purchase the least expen- sive ticket and then told the employees they could keep the miles if they followed these rules, then maybe the employee would be appreciative

of this added benefit, and decide to obey employer policy.

If employers think they can continue to act like "big brother," scrutinizing employee travel only then to reclaim the bonus miles their employees earn, they have much to learn about the proper organizational behavior that should be present in a competitive business in the 1990's 3o The cost of buying computers, consultants, and human capital on a dollar for dollar basis to monitor employee travel can far outweight the benefits received from a few free flights that can only be used at certain dates throughout the year and with a limited number of seats on each plane. Employer's should concentrate on their core operations and not get involved in the business of monitoring employee travel. Throughout our interviewing, we found too much valuable time wasted in organizations by employees attempting to find ways to overcome "the rules." If this wasted time was spent on making the company a more efficient organization, then maybe, the pecuniary benefits could make up for this so called "lost revenue."

As for employee abuse, if companies set up strict procedures regarding the purchase of tickets and then warn that they are well aware of all the games that are played with frequent-flier miles, we think that employees may be less apt to take unethical actions with their employer. The ramifications for breaking the rules, or defrauding an employer, should be dire and result in penal- ties that strongly dissuade the employee from playing any such games. These could include monetary fines or even demotion within the organization. A more favorable possibility however, might be some form of positive reinforcement for those employees who follow the mandates the employer chooses to establish.

C o n c l u s i o n

Attempting to solve the problems of the valua- tion and ownership of the miles is unnecessary if one chooses to see that the ethically respon- sible act is to let employees keep the miles earned on business travel. The successful employers in America have created an atmosphere where the

670 P. Lansing and N. P. Goldman

employee and the employer are one. They are a team and what costs one, is viewed as a cost to the other. The avant-garde employers advocate collaboration in their organizations and teach their employees to become members o f a team. To integrate such a philosophy into an organi- zation takes time and patience, but begins by its leaders setting examples that they wish their employees to follow.

N o t e s

1 These figures were projected form 'Travel Marketing: Spotlighting Frequent Flier Programs: Who Spends the Most, Who Leads the Pack, Who offers the Most Perks', Advertising Age, November 5, 1990, p. S-10. Toh and Hu found that frequent-flier members belong to an average of 2.26 programs. See Toh and Hu: 1988, 'Frequent-Flier Programs: Passenger Attributes and Attitudes', Transportation Journal, pp. 8-10. 2 Judi Bredemeier: Oct 20, 1988, 'Airline Consolida- tion Puts Damper on Direct Fare Deals', Business Travel News, p. 13. 3 This service is provided by the Wall Street firm of McLaughlin, Piven, Vogel Securities Inc. 4 Robert McNatt: Apr 1985, 'The Rider Rewards of Frequent-Flying', Money, p. 90. s This data was supplied by Runzheimer Inter- national. 6 Toh, Fleenor, and Arnesen: Feb 1993, 'Frequent Flier Games: The Problem of Employee Abuse', The Executive, p. 69. v Section 1.61 (a) of the Internal Revenue Code says that gross income includes income realized in any form, whether in money, property, or services. 8 Richard H. Deane: Jul 1988, 'Ethical Considerations in Frequent-flier Programs', Journal of Business Ethics, p. 758. 9 Andy Zipser: Sep 17, 1990, "Sky Is the Limit: Frequent Flier Programs Are Ballooning Out of Control', Barron's, p. 16.

i0 See Judith Dettinger's interview reported in U.S. News and World Report, April 22, 1985, pp. 28-29. 11 M. E. Levine: 1986, 'Airline Competition in Deregulated Markets: Theory, Firm Strategy, and Public Payoff', Yale Journal on Regulation, p. 421. ~2 Toh, Fleenor, Arnesen, p. 63. 13 Ibid. 14 Ibid. 15 Richard H. Deane: 1988, 'Ethical Considerations in Frequent-Flier Programs', Journal of Business Ethics 7, 755-762. 16 Ibid. iv Reggie Ann Dubin: Aug 5, 1985, 'Guess Who Wants Your Frequent-Flier Coupons', Business Week, p. 37. 18 Ibid. 19 Ibid. 20 Ibid. 21 Ibid. 22 Toh, Fleenor, Arnesen, p. 66. 23 Data supplied by Runzheimer International, a travel consulting firms. 24 Frederick J. Stephenson and Richard J. Fox: Fall 1992, 'Corporate Strategies for Frequent-Flier Programs', Transporation Journal, p. 39. 25 This projection assumes 20 000 miles of credit can be exchanged for a round-trip ticket in the conti- nental U.S. 26 Zisper, p. 17. 27 IRS private letter ruling 934007, June 29, 1993. 28 Robert L. Rose and Francis C. Brown III: Feb 12, 1988, 'Why Charge a Fare at All?', Wall Street Journal, p. 1. 29 Ariene Sains: Nov 1989, 'Perils of Perpetual Promotion', Adweek's Promote, p. 11. 30 Discussions with University of Illinois College of Commerce faculty member David A. Whetton, PhD and Professor of Organization Behavior.

University of Illinois, Dept. of Business Administration,

Champaign, IL 61820, U.S.A.