Paul Holmes 01 Nov 2005 // 12:00AM GMT
The CEO Hall of Shame is full of executives who believed they could make their shareholders—and, in some case, themselves—rich at the expense of their employees: individuals like Frank Lorenzo, whose hostility to the labor unions ran Eastern Airlines into the ground; “Chainsaw” Al Dunlap, who believed he could restore the financial health of companies by slashing the workforce and who left his last CEO job, at Sunbeam, in disgrace; Don Carty of American Airlines, who invoked “shared sacrifice” to persuade employees to accept $1.6 billion of concessions, and then—within days—awarded himself and other senior executives major bonuses.
For all the platitudes about employees being a company’s most valuable assets, for all the effort American corporations seem to put into securing their places on “Best Companies to Work For” lists, the reality is that workers at many large companies are beginning to suspect that their employers view them as a necessary evil.
Now along comes Robert “Steve” Miller, chief executive of automotive supplies company Delphi, whose plan for turning around his company—which lost $740 million in the first six months of the year and filed for Chapter 11 bankruptcy protection in October—depends on persuading its workers either to accept dramatic pay cuts (from an average of $27 an hour today to $10 an hour) or accept the termination of their pension plan, which is under funded by several billion dollars.
Comparing Miller to Lorenzo or Dunlap—neither of whom voiced any concern about the impact of their decisions on ordinary workers—is unfair to the Delphi executive, who has regularly prefaced his diagnosis of the problem facing his company with expressions of compassion for the people affected. “I’m painfully aware that I’m responsible for the welfare of thousands of employees,” he says. “That’s what keeps me up at night.”
But to his critics, those words ring hollow. “Once again, we see the disgusting spectacle of the people at the top taking care of themselves at the same time they are demanding extraordinary sacrifices from their hourly workers,” said Ron Gettelfinger, president of the United Auto Workers union, referring to Miller’s decision to improve severance packages for senior executives the day before the bankruptcy filing. And a recent employee e-mail told Miller, “You will walk away from this process paid for life, just like every other funeral you’ve presided over.”
Miller, a turnaround expert, is a veteran of bankruptcy filings at automotive parts supplier Federal-Mogul Corporation and Bethlehem Steel. And he responded to the charges that he was profiting at the expense of ordinary workers by pledging to take a salary of $1 a year until the restructuring was completed and persuading senior management to take pay cuts of between 10 and 20 percent.
“Delphi is simply a flashpoint, a test case, for all the economic and social trends that are on a collision course in our country and around the globe,” he says. Indeed, in seeking bankruptcy protection and threatening to renege on pension promises, Delphi is following a trail blazed by United Airlines, which defaulted on its pension obligations in May of this year. Delta and Northwest filed for bankruptcy in September and will seek approval from the courts for massive cuts in jobs, wages and pensions.
Meanwhile, General Motors reached a tentative agreement with the UAW to cut $3 billion a year from healthcare benefits and reduce retiree healthcare liabilities by 25 percent. And Wal-Mart recently found itself in hot water after The New York Times published a company memo describing plans to cut health costs by hiring temporary workers (who are not entitled to health insurance) and screen out workers likely to have high medical costs.
And this is only the beginning. According to Keith Burton, who leads the InsidEdge employee communications unit at GolinHarris, “Where they still exist, retiree medical benefits will be cut or eliminated in major companies. Essentially, companies will increasingly cut or weaken historic ties with their retirees. Premiums will continue to increase annually as companies seek to pass more costs on to employees. Employees will be forced to manage their own retiree options with increasing concerns for the future viability of federal programs.
“The transformation will be among the most dramatic we’ve seen in American society.”
Patrick Ford, chairman of the global corporate practice at Burson-Marsteller, agrees. “Virtually every company is dealing with the strains of skyrocketing medical costs,” says Ford. “Every difficult labor situation on which we’re engaged these days has an underlying set of issues related to healthcare and/or legacy costs—pension and other commitments made to retirees many years ago based on obsolete economic assumptions.”
Pensions and benefits make up a staggering portion of corporate costs—at GM, they account for about 3 percent of revenues. Miller, meanwhile, says that a $10 an hour base wage for a Delphi employee translates into a $20 all-in wage—adjusted to include healthcare and pension benefits, vacation time, and other costs.
Corporate pension funds actually grew a little healthier in 2004, according to a study of pension funds at 332 companies in the Standard & Poor’s 500 index conducted by Wilshire Research, an investment advisory firm, although they remain under-funded. Last year, the firms had investment assets sufficient to cover 92 percent of their long-term pension liabilities, up from 83 percent in 2002—but significantly down since the end of the stock market bubble of the 90s, when plans were 125 percent funded.
“What we’ve seen over the last five or six years is that corporate, and public pension plans for that matter, have gone from being flush in the late 1990s to being severely under-funded at the end of 2002,” says Wilshire analyst Steven Foresti. And the 92 percent number is an aggregate—some plans are clearly severely under-funded.
The Pension Benefit Guaranty Corporation, the government agency established to protect the private pension system, estimates that the amount of money currently owed to cover pension liabilities is $450 billion, with 851 pension plans under-funded by at least $50 million. The PBGC, which takes over defaulted plans, had a $23 billion deficit in 2004, and in any case places a cap on the amount it will pay workers, so that when it took over the United Airlines plan, with its $9.8 billion shortfall, it picked up only $6.6 billion of that obligation.
General Motors has one of the worst pension problems of any major American corporation. Its liability in the Delphi case (Delphi was spun off from GM in 1999, and the automaker guaranteed some of its financial obligations) could rise to $10 billion. Meanwhile, the company will spend $5 billion this year on healthcare, a billion dollars more than last year, the equivalent of about $1,500 for every car it makes. Much of that money is spent on former employees: GM provides health insurance to more than a million retired Americans.
There are understandable concerns that the automotive companies could follow the steelmakers and airlines into bankruptcy and radical restructuring.
“There have been many instances in which the auto industry has been the bellwether for the economy as a whole,” says Susan Helper, economics professor at the Weatherhead School of Management at Case Western University in Cleveland. “Henry Ford was the first to raise wages to $5 day, and the industry was at the forefront of adopting new technologies. Now it’s at the forefront of what we as a nation are going to do about wages and benefits and how we are going to compete in an era of high healthcare costs and low-wage competitors.”
Bob Matha, who heads the employee communications practice at Ogilvy Public Relations, is one observer who would not be surprised to see GM follow Delphi into bankruptcy, a move that would almost certainly allow the company to shed its obligations to retirees. That would force many other companies to re-evaluate their benefits, he says, in order to remain competitive.
In addition to the obvious cost pressures, there are reasons this revolution is taking place now.
“Pensions were job-bonding devices structured to encourage employees to stick around,” says Katherine Stone, a UCLA law professor who specializes in employment issues. “Employers no longer value these long-term attachments from the bulk of their workforce. Employers these days don’t really gain by offering their employees traditional pension plans.”
Miller clearly agrees. “The defined pension benefit is dying a slow agonizing death,” he told Time magazine earlier this year. “And I think it should be. It is not the right thing for workers. The problem for workers is that it lacks portability. Workers today like to be mobile. They may want to work one place for ten years and then go to another place. If you have a defined benefit program you are pretty much locked in. If you walk away from your employer you kiss your whole retirement package goodbye.
“And it’s not good for companies. Take a company that has a defined benefit program to someone who is 25 years old. It is something that a worker expects to collect on 50 or 60 years from now. No business can realistically give assurances that that promise can be made good 50 years from now not knowing what will be the course of history.”
At the same time, there is a political climate that encourages companies to become leaner and meaner, says Michael Bayer, managing director of corporate communications at Financial Dynamics in New York.
“The situation with pension defaults is part and parcel of George Bush’s ‘ownership society,’” Bayer says. “At this point, Americans need to know that they are the only one in control of their financial futures. Social Security has been up in the air for some time. Defined-benefit plans are struggling with long-term solvency. Family dynamics have changed to the extent where Americans can’t necessarily depend on their loved ones to care for them. All of this converges at a time when 76 million Baby Boomers will soon begin retiring en masse.
“This is an absolutely fundamental shift in the American safety net and the very notion of American retirement. It is now ‘Me, Inc.’ when it comes to securing my financial future.”
“I think companies today believe they have more permission to make these changes,” says Keith Burton. “For one thing, they believe employees are more accepting of change than a decade ago. They believe employees are more conditioned or hardened by a decade of transformation to take responsibility for their future and to be smarter consumers of the benefits they offer.
“Also, the ‘demand chain economy’ popularized by Wal-Mart has been used to strike fear and apprehension into many employees who see reductions in these areas as a strategy their employer may adopt to ensure competition and survival.”
At the same time, labor unions are far weaker than they were even a decade ago—a result of declining membership and dwindling political influence after six years of Republican rule in Washington.
“Where once presidents of these unions could march into the White House and leave with a pledge by President John F. Kennedy to end a strike on favorable terms, they are now sitting in bankruptcy court watching as unelected judges rip their contracts to shreds or ‘negotiating’ massive givebacks,” says John Jordan, president of Washington, D.C., public relations firm Principor Communications and a former union organizer. “The protection of labor rights in America has regressed to where this country stood in the 1920s. The result is neutered unions, stagnant wages, shrinking benefits and more insecurity.”
It’s no surprise that workers and retirees feel betrayed. Pensions are deferred compensation. Employees elected to take less money in their paychecks in return for a promise that they would receive a defined amount of money later. For many workers, company pensions were the only form of savings available, a promise that if they worked hard they could still enjoy a relatively comfortable middle-class life in retirement.
Economist and New York Times columnist Paul Krugman says that when companies like General Motors were profitable, they paid big dividends to shareholders but failed to safeguard pensions. The result of that neglect, he says, could be “the end of the era in which ordinary working Americans could be part of the middle class.”
And according to Daniel Gross, writing at Slate: “There’s plenty of blame to go around: clueless managers, atavistic unions, and indifferent politicians. Broadly speaking, the United States has collectively decided that certain industries, like electronics, are not worth keeping. Other industries are worth keeping, but only if they’re staffed by a new proletariat—immigrants who labor for low hourly wages and without benefits or union representation. And industries like steel, coal, textiles, and auto parts can survive only to the extent that middle-class stakeholders choose to become insecure industrial workers.”
Whatever the reasons and whatever the morality, one thing is clear: allowing companies to default on their pension obligations has “shifted all the costs of poor management decisions and competition to the oldest and most loyal workers,” says Teresa Ghilarducci, a professor of economics at Notre Dame University.
And employment-based health insurance is the only practical source of coverage for most working Americans under the age of 65. While Medicare covers the elderly and Medicaid covers the seriously poor, almost everyone else relies on a company healthcare plan—or did, until recently. Between 2000 and 2004 the number of Americans under 65 rose by 10 million, but the number covered by employment-based insurance fell by 4.9 million.
One reason is that healthcare costs have been rising faster than other costs, and are far higher in the U.S. than they are in most other developed countries: $5,267 per person in 2002, compared to $2,931 in Canada, $2,817 in Germany, and $2,160 in the U.K.—all of which have lower infant mortality rates and higher life expectancies.
“Unlike other advanced countries, we treat access to health care as a privilege rather than a right,” says Krugman. “This attitude turns out to be inefficient as well as cruel. The U.S. system is much more bureaucratic, with much higher administrative costs, than those of other countries, because private insurers and other players work hard at trying not to pay for medical care. And our fragmented system is unable to bargain with drug companies and other suppliers for lower prices.”
Certainly, many large overseas companies are beginning to see the American healthcare system as a disincentive to investment. Honda, for example, recently elected to build a new North American plant in Canada rather than the United States. One stated reason for its decision: our northern neighbor’s universal healthcare system.
Matha points out that “no U.S. company is actually required to provide healthcare coverage.” But lawmakers believed that companies would provide better healthcare coverage in order to attract the best workers, and as a result companies like General Motors negotiated generous healthcare benefits with their unions, eventually adding retiree benefits to the package.
“Ironically, as a result, pensioners are living longer—due to better healthcare—and GM is going broke financing the benefits.”
So there are clear cost-savings for companies that succeed in shedding their liabilities. But it’s far from clear whether attempting to wriggle out from under the responsibilities will incur other costs, more difficult to measure.
“Companies are trying to reduce their expenses and due to the size of the people costs, pensions and healthcare are at the top of the list,” says Barbara Edler, director of the U.S. enterprise change communication practice at Hill & Knowlton. “Unfortunately, this will have a major impact on employees, causing dissatisfaction, less loyalty and lower productivity. Ultimately, this will result in higher attrition, which means higher employee replacement costs and lost productivity. So it could result in a rob-Peter-to-pay Paul scenario.”
That possibility has not discouraged companies from seeking solutions that involve serious cuts to employee benefits.
“A workplace revolution is underway,” says David Grossman, president of Chicago-based David Grossman & Associates, which specializes in employee communications. “These moves are inevitable, I believe, and we’ll probably see more actions that re-frame the contract between employers and employees. Some of the old structures don’t make sense in today’s economy and world.”
Grossman says an increasing number of his clients are reframing the discussion about labor relations in terms of personal responsibility and empowerment. “What’s implied is the need for employees to take more personal responsibility in the new economy for their personal and professional lives,” he says. “It’s a little bit of ‘we’ll all be better off if everyone looks out for themselves, too.’
“Today, for employees, job security is about talent. I’ve always said when my colleagues were looking for employment that good people get jobs; today, good people keep jobs, too—more than ever. So employees need to look out for themselves and their organization by demonstrating their contributions to business results.”
That’s obviously a discussion that obviously needs to take place, and began in the 80s and 90s when most employees came to accept that the idea of lifetime employment was no longer practical or even—for many of them—desirable. The unwritten contract between companies and their employees is clearly being revised.
But that doesn’t help retirees, who find that written contracts signed years, even decades ago, are no longer being honored.
Does that matter? Compared to some other stakeholder groups, retirees have relatively little leverage. They can’t withdraw their labor like current employees. But companies nevertheless need to treat their retirees with respect.
“Retirees are more important than most companies may acknowledge,” says Burton. “When IBM went through its transformation in the 1990s, managers there told me retirees were the mentors and models for the continuing managers and employees. They helped interpret the changes and new policies for people. They were the men and women who had trained new leaders. They were trustworthy guides.
“The same is true in companies everywhere. How we treat retirees now and in the future will tell existing employees what we think of them. Will we be disrespectful? Or will we be fair and equitable?”
Retirees can have an impact on companies in several different ways, says Matha. Some companies are multi-generational, which means that retirees have children or even grandchildren still working for the company. Other companies have very organized and active retiree groups, as Sears found out when it tried to cut retiree benefits and found older people picketing outside several stores. And in general, retirees are a powerful political force, with groups such as the AARP wielding tremendous influence.
“If they get organized on these retiree healthcare and pension issues as they relate to companies, we can count on new legislation that companies won’t like,” says Matha.
Adds Christopher Hannegan, who heads the employee engagement practice at Edelman, “Retirees are a huge and often overlooked stakeholder group when it comes to internal communications. Even if a major company announcement does not affect retirees directly, they still play a large role in shaping public opinion about their former employer. A retiree of a company is just as much an unofficial spokesperson as a current employee. Often retirees crave to maintain a connection to their employer, especially in those cases where they have had long careers.”
Of course, companies need to craft communications messages that resonate with retirees and employees—and external stakeholders who care about the contract between American corporations and their workers.
When it comes to communicating any changes in benefits, companies need to do three things, Edler says. First, they need to be “open, honest, and direct about the changes.” Second, they need to give the reasons and rationales for any changes. And third, they need to explain the market and business context, which means talking about the global economy and long-term competitiveness.
“The tactical communications challenges accompanying this transformation are daunting,” says Matha. “Just getting people to understand PPOs, co-payments, deductibles, and formularies is tough enough. Explaining the economics behind the changes is even harder, especially if you are talking to a 75-year-old widow who until now has enjoyed extremely generous benefits, and sees them as an entitlement.
“These are complex topics that can’t be left to newsletters and intranet sites. Companies need to hold seminars, provide forums for open and candid dialogue and provide substantive help to employees to make financial transitions.”
Matha recently worked with an organization that was eliminating overtime for its line workers, a move that meant a 40 percent pay cut for many employees. The company brought in financial advisors to work with individual employees, providing one-on-one counseling. “That showed employees the company cared, and it really helped employees. That move, combined with continuous, honest education about the business, competitiveness and costs, enabled the operation not only to make the transition, but also gained employee trust, respect and confidence in management.”
Companies also need to be ready to answer “the endless questions” they will get from employees when changes are implemented, says Hannegan. “Often, companies just hit the ‘send’ button on bombshell announcements and then expect supervisors to immediately know how to answer questions. Supervisors and managers will benefit from as much of a heads-up as can be provided, as well as talking points tailored to help them know what to say to their employees. And they should be given the chance to ask questions and digest the news before being asked to play a role in broader communications to employees.”
Ford says companies need to look at several changes, including more training for leaders at every level of management to improve the quality of cascaded messages in companies. “Employees say time and again that the most credible information about their jobs comes from their immediate supervisors and people with whom they interact directly. We’re doing an ever-increasing amount of work with companies on customized training to improve managers to communicate effectively with their people.”
And in addition to communicating the immediate impact of these changes, companies will need to engage in a long-term education effort to prepare their employees for the new realities of work in America.
“Companies will ultimately be forced to do more to educate their employees to take care of their health, well-being and financial security,” says Burton. “We’ll also see an entirely new movement in business literacy: teaching people to understand the economy, the place of their employer in the economy, how the forces of competition shape cost structures and growth, and what employees must do to help the company be more competitive to preserve their future and the legacy of the company.”
But the tactical challenges of communicating these changes is small compared to the far larger challenge of maintaining trust with employees through difficult times.
“Companies are working with greater thought and consideration in these areas,” says Burton. GM, for example, has used a campaign approach to get in front of communities, the media, financial analysts and their own employees to discuss the need for change. Others are working in coalitions to study options, and to speak with one voice.
Says Burton, “The good companies are those that are being thoughtful of their historic covenants with employees; who understand that once certain benefits are cut or eliminated, they can’t return or recover lost loyalties. The good companies are those that may soften the blow with subsidies or one-time payments to help in the adjustment to future change. The good companies are those that explain the changes with purpose and meaning—in ways that are personalized through face-to-face communication at the front line.”
Ultimately, Matha says, the keys to success will be trust, respect and confidence. “I don’t think tactics are going to be the hurdle. We can figure out how to communicate information and understanding of complex issues. Employees already understand there is a cost problem around healthcare and pensions—they can’t read the newspaper or watch television and miss it. They know things will change, and they will accept that change if well led.
“The real issue will be leadership. I fear we’re sorely lacking in that area. We might have a lot of exceptional business managers, but not that many leaders. The lack of quality leadership in many companies is going to make employee acceptance of change very difficult. Good leaders are followed because they are trusted, competent and can and do communicate. Unfortunately, all too many of our business leaders spend their time looking at books full of numbers, and spend all too little time in the field where trust is built, competency proven and communications delivered.
“That’s going to have to change.”
The disparity between astronomical executive compensation and dwindling benefits for ordinary workers has already become a major issue in labor confrontations, according to Ford, who says he has seen union advertising that shows side-by-side photographs of the CEO and a retired couple, with copy that juxtaposes the CEO’s “seven-figure salary” (this is presumably an unusually modest CEO) with “the cuts in retiree benefits affecting John and Mary, the nice couple pictured.
“It is difficult to measure the impact of such attacks, however—other than the distractions for the executives cited. The best response is to reject any attempts to make this link. Executive compensation is a separate question and ought to be dealt with in that way.”
Others agree that CEO compensation is likely to become a bigger issue if ordinary employee benefits continues to feel the squeeze.
“I think most companies have historically maintained that the disparity can be explained by third party studies that point to the need for large, competitive compensation packages to retain top people,” says Burton. “That argument is not as persuasive now as in the past, particularly given corporate governance and Sarbanes-Oxley requirements.
“Smart leaders will evaluate these issues and decide, in some instances, to take adjustments themselves, or to give back stock equity, or to accept less like their employees—if they want to maintain their good will and loyalty.”
Hannegan agrees. “Many CEOs have reaped an incredible amount of internal good will by forgoing pay during difficult times,” he says, “or being incredibly transparent about their pay.” Whole Foods Market, for instance, publishes the salaries of every salaried employee, on the assumption that such transparency “ensures parity and eliminates all the energy some workforces spend on trying to figure out how much their colleagues are paid.”
At the same time, good CEOs will be able to make the case that they are worth every penny.
“We’ve used the line ‘you get what you pay for’ in defending quite a few CEOs,” says Matha. “It works when the CEOs are good at their jobs, which translates into many positives for employees: on an emotional level the feeling of trust and confidence and caring leadership; on the rational side, the belief they have a better shot at security, opportunity, competitiveness. Employees are willing to accept highly paid CEOs if he earns his pay.
“For those who don’t make grade, however, I believe the going will be rough. In employee minds, as the benefits go lower, the bar for CEO competency goes higher.”
If companies don’t handle these issues responsibly and with sensitivity, pressure will surely mount for legislative intervention.
Already, there are calls for Congress to clear up the confusion that surrounds pension contribution regulations. Today, companies can be technically current in meeting their obligations while owing billions in shortfalls: Bethlehem Steel’s pension plan was 84 percent funded on a current-liability basis, but only 45 percent funded when all termination costs were tallied. Critics would like to see tax incentives for firms to pre-fund pensions when times are good.
BusinessWeek, meanwhile, recently editorialized that “Congress must act to ensure that all workers receive timely, understandable information detailing whether their pension plans are adequately funded.” Today, companies need to notify PBGC of serious problems in a timely manner, but can take up to 30 months to publicly report problems with their pension plans.
“If individual corporations and their advocates leave a communications vacuum, it will have consequences,” says Ford. “A number of companies have become strong advocates for strengthening the PBGC or finding other policies that can shift the burden of untenable legacy costs from business to government. But these developments need to be seen in the context of other significant trends, including the growing radicalism of Big Labor, concern about corporate ethics, and the aging baby boom generation and the profound effect on workplace issues generally.”
At some point, the bigger issues will also have to be addressed.
“This seems to be a symptom of a much larger transformation,” says Matha. “It could be said that with the transfer of traditional, middle-class jobs overseas we’re continuing on a path of creating a greater divide between rich and poor. This shift started with the movement of manufacturing jobs to Mexico and now to China. It continues with the movement of heretofore white-collar jobs to places such as India. If these trends continue, there will be two classes of people left with jobs: people with innovative knowledge jobs and the people who mow their lawns.
“The consequences of that are a bit ominous. You need to look no further than the suburbs of Paris today or the U.S. riots in the 60s to see what happens when the disparity becomes oppressive. In these instances the issues were economics, race and religion. Add the notion of life and death—which is ultimately the consequence of health care—and the withdrawal or removal of once-promised and generally expected pensions, and we could have some nasty unrest on our hands.”
For that reason, it doesn’t make sense to look at cases such as Delphi or GM in isolation. We need a national debate on healthcare and retirement benefits that includes government, employers, unions, and other stakeholders with an interest in the outcome.
“Ultimately, I believe there will be a solution that’s shared between business and government,” says Matha. “Right now we’re struggling in a tug-of-war between the two because neither wants nor can handle the burden alone. That level of public/private cooperation, on a grand scale, will be a societal transformation in itself.”