Asymmetrical Information

I honestly don't understand why American auto companies aren't already dead. Investors don't wait until you're out of money to bail; they do it when they see that you're on an inevitable path to bankruptcy.

Let's review:

-They're locked into legally binding deals where they have to pay workers even if they're completely incompetent (but don't deal drugs at work), and/or have no use for them.
-They're saddled with legacy health and pension obligation funds that they have to pay with new revenues. These are not adding to current product value, and their foreign-owned competitors' operations don't have have to pay these costs. (Supposedly, the DPV of these obligations is enough more than cancel out their book values.)
-They're staffed by people who aren't smart enough to check on how their benefits are actually going to be paid.
-Their cars suck (okay, debatable).

I almost want to go to Wilshire Associates and say, "Um, hey, I know you're not trying to actively manage and all, but I've got a total stock market index fund going on, so could you, like, clip GM and Ford from your index? Oh, and some airlines. Thanks."

Does anyone have a reasonable idea about how they would dig themselves out of this hole?

That's the way unions work. Level compensation no matter how good the employee is, level chances of getting sacked no matter how productive the emoloyee is, and level the buyout of the union contract no matter how good the employee is. The poor performers benefit under unions and the productive pay.

So if I may combine your last two posts, your recommendation is that workers should quit their union jobs and move to trailer parks.

Any other good advice for America's worker bees?

"They're locked into legally binding deals where they have to pay workers even if they're completely incompetent"

And what happened to the brilliant management HR staff that hired them?

"They're saddled with legacy health and pension obligation funds that they have to pay "

Deferred compensation earned and now stolen by management.

"They're staffed by people who aren't smart enough to check on how their benefits are actually going to be paid."

I am not really sure what that stupid comment means.

"-Their cars suck "

And of course, designing autos is a union function for which management shares no responsibility.

Mr. me:

And what happened to the brilliant management HR staff that hired them?

Irrelevant to the matter of why investors haven't realized the inexorable end of GM or GM really has an ace in the hole.

Deferred compensation earned and now stolen by management.

No.

1) Defined benefit contributions can NEVER be known to accuracy until beneficiary's death. There is always the possibility that it will be underfunded, even with best of intentions.

2) The *health care* obligations were specifically agreed to be paid from future revenues with no advance funding.

"They're staffed by people who aren't smart enough to check on how their benefits are actually going to be paid."

I am not really sure what that stupid comment means.

It means that the employees they've had never bothered to ask where their money was coming from. That's stupid. The stupidity probably spills into other areas that affect product value.

And of course, designing autos is a union function for which management shares no responsibility.

WHAT???????? You mean ... you mean ... low wage low-ranked grunt workers AREN'T the genesis of all wealth produced in a market economy? Say it is not so!

Okay, more seriously (was I being serious?) -- even if they had the best designs humanly possible, it wouldn't have saved them. Good designers can be poached, and when your foreign competitors all have an inherent advantage -- that they don't have to throw away money like you do -- no company is safe. Google could not handle this kind of required payment that their competitors didn't have -- and they're extremely well-managed and have great product designers.

"Okay, more seriously (was I being serious?) -- even if they had the best designs humanly possible, it wouldn't have saved them. Good designers can be poached, and when your foreign competitors all have an inherent advantage -- that they don't have to throw away money like you do -- no company is safe."

By 'throw away money" I assume you mean pay a decent wage to an American worker so he can raise and educate his family in a decent environment.

By 'throw away money" I assume you mean pay a decent wage to an American worker so he can raise and educate his family in a decent environment.

You assume incorrectly (and I'm not even going to touch the populism except to say I hope you grow out of it). By "throw away money" I mean "pay benefits from current revenue for retired workers". AND BEFORE YOU POP A BLOOD VESSEL, read the rest. Obviously, since the contract requiring you to pay those benefits was a precondition for *getting* that worker's production, certainly "non-productivity now" is no excuse for stiffing that worker -- of course not. The point is, pay-as-you-go schemes are inherently fraudulent. That obligation should have been settled to the fullest exent possible the *moment* the worker was paid for his original labor. The pension should be paid from a separate trust that is completely de-coupled from the corporation's finances. (They should never be allowed to "borrow" from it.)

Bondholders, too, "aren't doing anything for the company right this moment", but obviously, the corporation is expected to pay them. This is because the money invested through the bonds was supposed to be used to enhance value productivity, and a fraction of that gained productivity is the bond payments. Similarly, to the extent that a corporation gets workers to work for it through the offer of deferred compensation, it's getting a "loan" -- it doesn't have to pay as much *now* as it otherwise would have for the labor, and that "advance" on labor should have been used to generate enough value to pay it back when the obligations come due.

But it wasn't. It was squandered, because the automakers had no competition, and they thought this would continue indefinitely. So *today*, this "bond payment" that has come due just shows up as a payment for no benefit -- in effect, "throwing money away". They're not getting any value now for it, and it's not a repayment of value they were advanced earlier. They are forever at a competitive disadvantage.

Going back to Jane's original topic, I think there's less distinction between the competent and the less competent in environments where the job is more well-defined.
There's a giant difference between a good and a bad computer programmer. There's probably less difference between the output of a good and a bad person on a traditional production line.
Skilled manufacturing workers (such as at Ford) probably fall somewhere in the middle of this spectrum, but they are stratified by job level - in other words, everyone at the same pay grade is probably all at roughly the same productivity level.

Now, if you were talking about the retirement incentives that the phone companies used to give, I'd agree that many of the wrong people left. But less so here

I think the possible benefits of buying out workers are being completely neglected here.

Furthermore, it is being assumed that the only variable of interest is how well-paid a job the employee would be able to secure elsewhere after accepting the buyout, and that all the employees have accurate knowledge of this, and that differences between employees in discount functions (e.g. how much they value future income vs. present income) are not a relevant factor.

In the real world, many people don't necessarily make their decisions based on full knowledge applied with complete and rigorous logic. Also, different people's discount functions differ.

Furthermore, people who take a relatively long view of the effects of their actions are often more desirable employees than are people who take the short view. This difference might be highly correlated with discount function. The "longer-view" employees might be more conscientious employees.

Auto workers who are sufficiently in touch with the real world to realize that their unionized jobs are actually quite well-paid, and who appreciate that their employer's normal wages are already a profuse reward, might decide that taking the buyout would hurt them in the long run, and might therefore be less likely to accept the buyout offer. These appreciative workers might be the ones you'd want to keep for reasons of willingness to work hard, improvement of morale, etc.

Workers who are short-sighted and who irrationally fail to appreciate their jobs might be more likely to take the buyout.

I'm not saying these are the only relevant factors!

I'm just trying to widen the field of view a bit beyond the most simplistic default assumptions.

American companies aren't dead because they are quite good at what they do. Consumers believe that the Japanese have a monopoly on quality. That simply isn't true.

The article ought to ask "what kind of automotive worker would choose to take the cash offer?" The answer, of course, is those whose opportunity costs are low, namely, those who can get cash from Ford and are confident that they can get a new, well paid job somewhere else. When I've seen similar programs rolled out elsewhere, we called this group "the competent".

It is for exactly this reason that golden parachutes for executives don't protect shareholder value. Good managers don't need them, and bad managers won't use them (or will at least try not to use them). I guess it may be possible, on the margins, that it encourages bad managers to leave, but for the bad manager, 2.99x salary and bonus isn't enough to buy him off, knowing he won't get another job like that again.

American companies aren't dead because they are quite good at what they do. Consumers believe that the Japanese have a monopoly on quality. That simply isn't true.

In terms of autos, the Japanese nameplates may not have a monopoly on quality, but they're the primary ones tapping the goldmine.

If you want to get rid of a stock from an index, why not just short it to the corresponding amount? A bit of a hassle, but it might be a good idea here and there.

AT
I think you misunderstand how golden parachutes work.
They are not at all like the pension buyouts we are talking about here.
Golden parachutes are routinely put in place at many companies long before there is any sniff of a takeover. They are there to provide security to senior management in the event of a takeover.
In such events, these people are extremely vulnerable since most buyers prefer to install their own management team.
They are a cost of doing business - you can't attract good executives without them. Also, the cost is effectively borne by the company doing the takeover.

So perhaps we might argue that they are bad since they drive up the cost of takeovers. However, I think our system works a lot better than many others in that sense.

Incidentally, the government some years ago restricted the deductibility of such payments. The result was that companies simply applied gross-up payments to cover the taxes plus the taxes on the gross-up.

So to the extent that parachutes restrict the efficiency of takeovers, the government made it worse.
One indication that

I think for production workers, the competence issue is not so clear. The 45-year-old worker may be the most competent but also the one for whom starting over would have the highest opportunity costs--not necessarily because of an inability to acquire new job skills, but because they are more rooted -- they own homes, they have older children for whom moving is more difficult, etc. And, of course, the only way Ford was going to get UAW to go along was with voluntary severance.

For engineering and management, though, I think a voluntary program is a really bad idea. They need offer retention bonuses for their best and brightest to stay, not incentives for them to jump ship and sign on with Toyota (while pocketing the buyout). Toyota just broke ground for a new R&D center about 20 miles west of Ford HQ. They're certainly not going to hire all those thousands, but I'm sure they'll be quite happy to skim off the cream (and the last thing Ford should do is make that easier by offering voluntary buyouts).

I think it's important to note that every single union worker at Ford and GM has known that this might happen for some time.

This isn't the 1970's, when workers were shocked and surprised when the automakers started losing money and closing factories. These days, every highly-paid assembly line worker has seen what happened in Flint, Michigan and that it might happen to them. And now it is happening to them.

In this sort of envionment, your hypothetical 50 year-old sheet metal worker has no excuse if he does not have some sort of a backup plan.

And in fact, all of the auto workers I know (how many of you Marxist types actually know any auto workers?) do indeed have a backup plan. They all fully expect that they may be laid off at some point. Some are idiots and have never prepared for this eventuality. But most are ready to one degree or another. Ready to find other work in another field, or ready to pack up and move to an area where there are more jobs.

A friend who got laid off from the GM plant in Logansport, IN a couple of years ago (after working there for 12 years) got another job TWO DAYS after receiving his pink slip. He now works for a mortuary. His employers like him and seem to be preparing to make him a partner in the business. While my friend was employed by GM he was careful to pay down his mortgage and save money, so if he hadn't obtianed another position right away, he would have been fine.

The second he got laid off, he started looking for work. He didn't go down to the union hall and start drinking heavily, crying into his beer and whining "what am I going to do?" He hit the pavement and started looking for another job right away. He expected this process to take several months, and anticipated that he might have to move, but instead someone hired him immediately.

This is the sort of plan you have to have nowadays if you are an auto worker, a steel worker, or work in any industry that periodically has mass layoffs.

Person,

As far as equity investors are concerned, the American auto companies are already dead. Just check out the market capitalizations of Ford and GM and compare that to the gross receipts. And even the bondholders know the jig is likely up- just check out bonds due in about 20 years.

Chris,

It is important to get the initial assumptions correct, and I have to admit that I am not sure what kind of employee will take the buyout and which will not, but I do think that Winterspeak is correct that the ones most likely to leave are actually the ones you would most likely want to keep. However, the company wants to get rid of a certain number with the least amount of ancilliary costs and bad publicity- so it takes this chance.

And as for the quality issue, my own experiences and those of my friends is that the Japanese auto companies are far out in front of everyone else, and that includes the European autos which are no better than the American.

He now works for a mortuary.

From one dying business to another, eh?

I love being a counter-example. At 45, working in a metal fabricating shop where I'd been hired straight out of welding school 22 years before, I found that the opportunity costs of leaving and starting over were less than the benefits. Pulled up stakes, moved where housing prices are lower, and now I do contract work for the cellular telephone companies. Note that learning about computers on my own time, and the Gingrich-era "tax breaks for the rich" made this possible.

"(how many of you ... types actually know any auto workers?) " (ellided the marxist because I'm not)

3: My father-in-law, bother-in-law, uncle-in-law, all Ford (my cousin-in-law worked for Visteon, but took a buy-out last year).

They are in a world of hurt, not so much becuase they are dumb or unskilled, but because there will be several thousdand other similarly skilled workers fighting for the same jobs locally (or if they choose to take a transfer, in a different state...assuming they can sell their homes bcause the hosuing market is going to be affected by the closing of the palnt too.)

There is a lack of flexibilty, and inertia that can build up. Live in the same house for 25 years, have kids in high school or college and just oving to where the jobs are is hard. Not impossible. Not unreasonable, but it does hurt. The buyout for many of these people will cover transition costs, but not much more. I saw the same thing when the Air Force base where I was stationed closed.

Look, Ford is trying to survive. To me, their problem is not the factories, but the dealerships. I will not ever buy another Ford because I am fed up with the slime at the purchase end. Ford does make good vehicles, but the purchase process leaves a bad taste in many peoples mouths. Sadly, Ford can do little about those slime balls.

Kristian: how can you say someone is "not dumb" and also genuinely surprised by the idea that their employer is not an endlessly profitable fountain of wealth?

"Kristian: how can you say someone is "not dumb" and also genuinely surprised by the idea that their employer is not an endlessly profitable fountain of wealth?"

Don't be insulting. They know that Ford is in trouble. I have heard the discussions. I have seen over the last 5 years my father in law jsut trying to make it to 30 years. He has been laying the ground work for a new job for 2 years. And he is not alone. My brother in law took a transfer from Ohio to Michigan (along with hundreds of others) to move from a plant on the chopping block to a secure location. As I noted, my cousin in law took an educational buyout last year and is currently going to college. While you may think its dumb to stick it out, a lot of people are loyal, others are so close to retirement that walking away is financial suicide.

And note, I did not say they were blaming Ford. Or Bush. Or the Japanese. Or the pice of gasoline. Or even the union. They know it is combination of legacy costs, competetion, resource costs and general lack of productivity. I talk to them. They KNOW there is no silver bullet solution.

I would think that those most likely to take a buyout are the young. For one thing, the present discounted value of acquiring a new skill set is higher.

That means that after the buy-outs, Ford should have an older workforce, with more near retirement. I'm not sure what that accomplishes.

To get back to Jane's question - the best do not necessarily leave in a buy out programme. I speak from experience (in a different industry). What happens is that people who have been given good appraisals are more likely to stay and people with bad ones or who have been told they have limited career prospects in the company leave. Why - obviously the ones that are getting good appraisals tend to be happier with the general set up - and they are getting their reward both from monetary terms and the general stroking you get as a high achiever. Plus often they get an opportunity from new vacant positions. People who take the package rarely have a job to go to, if they did had a good job prospects elsewhere, they would already have left.

Obviously this analysis does not apply to the line workers, but as was stated by others above, the really is little difference in productivity between the best and the worst - that was Henry Fords insight.

On the general state of the US car industry - it is a mistake to think the leaders of that industry are stupid - they all generally went to the same schools the rest of us did. The reason that it is in the state it is in is, ironically, because it was so successful for so long. Any industry like that tends to become very specialised and good in doing what it does, rather than thinking about ways to do what it does in new way. Another way to put this - in a highly succesful company in a stable industry you do not need to have innovators or innovation systems - they are a cost.

"This Slate article asks why automotive companies, in particular Ford, should offer big cash incentives to workers they want to fire"

I don't know, but companies sure seem to do this a lot with managers, so I can't get too worked up about hourly employees getting in on the action.

Joe Schmoe is right. The vast majority of the workers today were hired AFTER the 70s, after the rust belt, after Billy Joel and Bruce Springsteen had whined about the mean old factories not giving the workers lifetime employment. They should have known better. Had the unions and management switched to a 401(k) type retirement for those hired after say, 1982, then 80% or more of those getting bought out would be worlds better off.

Since it seems to matter to some: Mother, father, brother, 2 sisters, brother- and sister-in-law all worked for GM. (Hamilton stamping and Norwood assembly plants) There is plenty of blame to go around for the Big 3's woes but my personal feeling is that design and management decisions at the top are the biggest problems.

The incompetent people at Ford and GM are in the executive suites. They're the ones who mismanaged union relationships and agreed to give away the store to the UAW. Japanese and German auto companies both employ union workers in their home markets, yet they have prospered. Idiots like Roger Smith managed US automakers into the ground.

"What happens is that people who have been given good appraisals are more likely to stay and people with bad ones or who have been told they have limited career prospects in the company leave."

Not in a union shop. Everything is straight seniority. Good appraisal or not, if your behind a bunch of useless 20 year employees and your a hard charging, high appraisal valued employee, you need to to a good look at the offer and check to see how many people YOU are ahead of in senority.

The problem is that the idiots aren't Ford's CURRENT senior management (well maybe some of the Frod family, but generally not otherwise). It's the elderly or dead execs that went for the go along get along union contracts, knuckling under to the "consensus" of the 40s, 50s, 60s, 70s, and 80s that capitalism was bad and you have to be nice to the unions. Sure they had strikes, but nothing like before the New Deal. Just like the New Deal, and the more aggressive things done by actual Communists and European Social Democrats, we are seeing how large organisations aren't invulnerable to the laws of physics or the aphorism that "things that can't go on forever, don't". It's just that the bigger the organization, the more inertia there is, and the longer it takes to all fall apart when things are bad but not suicidally so (USSR etc being suicidally bad).

It's too bad that bondholders and employees can't go after the union execs and company execs that agreed to these idiotic deals. A hope just as forlorn as politicians actually dealing with social security before it's an utter disaster (see Bush, demonisation of, total obstructionism of any SS Reform by Senate Dems for stupid reasons).

Buzz - my comments were in reference to the layoffs in the management in terms of appraisals etc. I agree that the line workers are in a different place - but, as my post mentioned and others have also said here - the range of productivity on the line between the best and the worst is small. This is why we have assembly lines in the first place. Henry Ford (and others) realised that the way to make a polyglot untrained workforce productive was to break the task of assembling a car down to its single steps, then have each step done by a different person. In other words, you need to be very skilled to assemble a car singlehanded, but not very skilled to screw the same nut onto a wheel 400 times a day. Any changes in productivity of the assembly line system are controlled by the people managing the line, in other words the management.

Again, I think it is a mistake to say that the leaders of the US car industry are or were stupid (even Roger Smith). In terms of Occams razor what is more likely? - either i) all the big three simultaneously hired only stupid managers for a few decades, or ii) there appeard structural issues that affected all three for which even the greatest manager would have struggled? Now we can debate what that structural issue was - I believe there was an inflection point where the motor industry changed from a national to global industry. Prior to that inflection it was entirely logical that the car companies should offer the packages that they offered, post the inflection point it perhaps was not. The proof? On the ultimate voting machine - the stock market - the shares of the big three were all booming at the time. If it had been clear then that these packages were bad business the big three stocks would have crashed then, not now. By the way I have no connection with the car industry in anyway, except as a user of their products.

Being that most of the Japanese automakers have plants in the US to jump the tariff wall, why wouldn't it make sense just to look for a job with one of them? San Antonio is getting a big Toyota plant, the Honda I drive was made in Kentucky, I'm sure that for the time being those companies are likely to remain profitable and expand. It isn't like demand for cars is going away.

ChrisA: That's a good point, but if investor's aren't bailing now, it's hard to understand what logic they operate under, and thus why GM would have been an objectively good investment in the 50's. I wouldn't discount people simply having a poorer understanding of the world back then. Today, it's pretty uncontroversial that cheap third-world labor will try to take away whatever service you're good at, and that was unthinkable back then.

Also, let's not forget that people were genuinely surprised in the 70's when the devaluation of the dollar was followed by massive inflation. Then when they tried to "fight this" with price caps, they were surprised again that candy bars started shrinking. Go fig.

The bit about opportunity cost strikes me as spot-on. Employees in my company are unionized. Every few years, management offers buyouts in an attempt to clear out the deadwood and get rid of some folk at the top of the payroll. The deadwood almost never goes for the buyout because they've got a sweet deal going on now. They are guaranteed a salary for minimal effort, and know that it's almost impossible for them to get fired. Those who take the buyouts are largely the respected, hard-working people who can collect more than half a year's salary and then quickly find equally well-paying work elsewhere.

Good managers are able to cope with change, while poor managers are overwhelmed by it. US autos have been losing market share since the 70's. This is a clear indication that management has been unable to cope with changes in the marketplace.

GM and Ford had policies of hiring from within, promoting on the basis of cronyism rather than merit, and refusing to hold top managers accountable for their results. This is a recipe for finding stupid managers.

>"They're staffed by people who aren't smart enough to check on how their benefits are actually going to be paid."
In the past, getting a copy of your company's Form 5500 filing was dificult and expensive. I used to get a letter each year from GM saying that I could get my own set of photocopies of the pension plan filing for around $270. Today, those plans are usually available online for free. I've linked in my name to one such: freeerisa.com. You may notice that the GM filing is more than a year past due (they're "due" around June/July, and online sites usually take another 6-9 months to get them and make them available), and that 2004 is the latest year for which online copies of most companies are available - or 2003 for GM. Very few of the forms won't be available for public inspection, and those are the ones with lists of SSNs of the covered participants.

If you know what you're looking for, on the 5500 filing, you can tell a lot about the financial health of a company and the assumptions that go into them. Schedule B has the acutarial assumptions, and Schedule H has the list of assets and liabilities.

Some companies have one pension plan for their union workers, and a separate plan for their salaried workers, and sometimes a third plan for their executives. When they get into financial trouble, and if you're able to decipher what you're reading, you'll find that the executive plans are fully funded while the hourly/regular workers' plans end up underfunded. You can see the trouble signs when they make calculations based on their investments getting very high interest rates. Sure, if you can get 12% interest per year, you need far less money to provide for those benefits you promised than if you can only get 4% interest. Those plans that go one year from "fully funded" to "tens of billions of dollars in the red" were ones making fraudulent assumptions.

During the merger mania of the 80s, many corporate raiders plundered assets that had been set aside for pensions. Oops, too bad.

It wasn't the guy on the line who designed the flaming chariots of the 70s, or the GM identicars of the mid-late 80s, or any of the other disasters. They were all mismanagement decisions. Yet it always seems to be the blame of the line worker for those cars. For the past decade they've been making SUVs which have about 5x the profit margin of passenger cars, and now that oil's been going back up, the buying public is shopping for something with a monthly fuel bill smaller than the monthly car payment. Yet somehow making gas hogs will get blamed for it, rather than the idiots who actually made the decisions.

Sorry, Peter, I've heard that before and I just can't buy it as an excuse. If I were shielded from knowledge about where my money was going to come from (that much money anyway), I would assume that it's just not there, and plan accordingly.

Look at another case: let's say that I offer people jobs and tell them that if they work for me for 20 years, I'll give them a million dollar a year pension. Is *that* enough grounds for someone to make sure the money's actually there?

Re: poor designs. I really don't think they are a relevant factor. Like I said above, they could have had the best designers in the world. If they're shackled with unfunded benefits, any advantage they have will be competed away. Google would not last long with these kinds of obligations, and their managers are stellar.

"To me, their problem is not the factories, but the dealerships"...the whole dealership issue needs more discussion. There are apparently state franchise laws that make it very difficult for auto mfrs to exercise meaningful control over dealerships. And, dealerships for a given brand are so dense in urban areas that I bet 80% of the sales effort goes to competing against other dealerships of the same brand, rather than other brands/manufacturers.

I don't think Alan M, Ford's new CEO, has much experience dealing with dealer sales channels..in the commercial airplane business, you can know most of your customers on a personal basis--very different in mass markets where the product is sold indirectly. Probably one area where he'll need to do a lot of learning fast.

"Deferred compensation earned and now stolen by management.

No.

1) Defined benefit contributions can NEVER be known to accuracy until beneficiary's death. There is always the possibility that it will be underfunded, even with best of intentions.

2) The *health care* obligations were specifically agreed to be paid from future revenues with no advance funding."

So pearson, somebody like you comes along and waves a magic wand and just makes it disappear? It sounds like you are saying management bargained in bad faith.

Sounds more to me like accounting fraud and fraud brooked by government, and not the guy who expected to get paid what he was promised.

Mr. me: I think the *both sides* bargained in bad faith. The unions bargained with "faith" that their employer is a perpetually profitable exploiter who can afford any kind of benefit. They could have instead negotiated higher pay *now* and invested it themselves in some union-run trust totally separate from the employer and with individual accounts. (Kind of like what Gladwell was praising before he lost it and suggested Social Security is better.)

I will agree that management should *never* be allowed to "borrow" from the pension fund -- that makes workers involuntary bondholders. But at the same time, workers have a responsibility to know where the money is supposed to come from, and if that can't be shown to them with full transparency, treat it as a non-benefit for purposes of negotiation. Apparently, the whole time they were thinking "Oh, GM has a pot of gold somewhere." Deception from others does not excuse self-deception.

Peter,
You are spouting off about things that you don't understand.

Pension plans are required by law to be funded according to very specific guidelines.

Executive pension plans are NOT funded. By law, they are not allowed to be funded. In fact, if the company ever tried to fund this promise, then the entire valiue would become immediately taxable, thereby defeating the purpose of making it a pension plan.

In fact, executives have proportionately LESS security in their pension plans on aggregate, since the government sets dollar limits on what can be provided through a tax-qualified pension plan (and 401k's).

Most executive plans are quasi-funded through a so-called rabbi trust in which any money set aside is specifically not protected against bankruptcy.

Executives may have a lot of things, but pension plan security is not one of them.

Also, it is simply not true that the pension actuaries for a company can simply choose a high discount rate like 12% just because they feel like it.

Finally, while there may be differences in funding levels betwen two qualified pension plans maintained by the same company, they are both subject to both minimum funding levels (set by the government) and maximum funding levels (through restrictions in how much contribution is tax-deductible, again set by the government - not the evil corporation).

Are you just making things up?

"In fact, executives have proportionately LESS security in their pension plans on aggregate, since the government sets dollar limits on what can be provided through a tax-qualified pension plan (and 401k's)"

Speaking of making things up, that statement is crap, since the vast majority of a senior executive pension is non-qualified. Here's an ad for how to make a SERP bankruptcy proof right here: http://ilf.hartfordlife.com/public/products/serp/index.shtml . Yet another reason the next round of bankruptcy reform should include exponentially harsher treatment of officers and directors, including the outlawing of this despicable practice.

"management should *never* be allowed to "borrow" from the pension fund "

At IBM their profit is called "vapor profits" because 1/3 has come from the pension fund, stolen as I put it. That money has been used for 17 Billion in stock buybacks the last couple years. There is no union at IBM. When Mr. Watson said we will take care of you, only you would appear to not believe management. All of this has led to IBM stock falling 20% since Palmisanno has been CEO.

What I really need you to explain, is why there is no money for my pension and yest there is always money for Palmisanno to have a
$10,000 a day pension when he retires?

All of the talk about how unions and management made stupid decisions just faults people for being unable to see the future clearly. If the Japanese didnt't learn how to make cars so well and if the cost of healthcare had not exploded the decisions wouldn't seem so stupid.
Current management needs to stop making stupid decisions and current union leaders need to realize the goose that lays the golden eggs is very sick and needs their help to recover.

Mr. me: I won't go into the economics of executive compensation; however, I do think that when THAT MUCH FREAKING MONEY is being promised to you, you owe it to yourself to make sure it's actually, you know, possible. I wouldn't believe someone who claimed he could deliver a million dollar a year pension to me, and I wouldn't believe he could deliver *any* pension if it were so difficult for me to find its status and it could be "borrowed" from. I'd *start* from the assumption it will be nothing. I'd *agitate* to convert to a defined contribution plan.

Part of the problem comes from people *wanting* to believe that their employer is this endlessly profitable behemoth. It's hard to convince them otherwise.

If the Japanese didnt't learn how to make cars so well and if the cost of healthcare had not exploded the decisions wouldn't seem so stupid.

Yes, good point, if fundamental economic principles (like the crap about higher profit margins -- as would be necessary to fund their promises -- draw new entrants) didn't apply, these decisions would look freakin' *genius*. However, like anyone over age ten could have realized, they do apply.

J
I checked the link you provided from Hartford.
It seems to back up what I said - it's simply an annuity. If a company buys an annuity on behalf of an executive, the executive is taxed IMMEDIATELY. In which case, it's not a pension.
On the other hand, if the company owns the annuity, then it is no different than any other corporate asset. The executive has to hope that he will get paid from it at a future date.
Thus, the annuity can either solve the security problem, or the taxation problem, but not both.

The web site does give an inkling of the contortions that companies go through in order to provide some degree of security fo their execs (I know this because I worked in this specific field for a number of years).

Contrast this with a union pension plan. The assets there sit in a trust, they cannot be touched by creditors or by future corporate buyers in the event of a takeover. Believe me, you cannot get much more secure than that. There are even diversification rules.

Remember - they key to all this is taxation. If I have to give you something today because you got taxed on it today, then it is not a pension plan. It is immediate compensation.

J:
A suggestion - don't throw around words like "crap" unless you REALLY know what you are talking about.

"being promised to you, you owe it to yourself to make sure it's actually,"

pearson, after 30 years of working for it and expecting it, with a corporation making 10 Billion dollars a year profit, there is NO reasonable expectation that a pension would disappear. In your brilliance, please tell us where someone in their mid-50s goes to make up the 50% loss of expected income and make the additional money to cover healthcare?

So for 25 years it was true and they delivered and now the last 5 years it's just too bad?

"I'd *agitate* to convert to a defined contribution plan."

This statement shows you really don't' understand what is being lost here. If a person today contributed the max to the defined contribution plan they will receive exactly half of what a defined benefit plan would pay.

If you way was so smart, when IBM got nailed for age discrimination for screwing people over 40, why did all of the employees with a choice pick the defined benefit instead of your way. That my friend, is a real world example.

"being promised to you, you owe it to yourself to make sure it's actually,"

pearson, after 30 years of working for it and expecting it, with a corporation making 10 Billion dollars a year profit, there is NO reasonable expectation that a pension would disappear. In your brilliance, please tell us where someone in their mid-50s goes to make up the 50% loss of expected income and make the additional money to cover healthcare?

So for 25 years it was true and they delivered and now the last 5 years it's just too bad?

"I'd *agitate* to convert to a defined contribution plan."

This statement shows you really don't' understand what is being lost here. If a person today contributed the max to the defined contribution plan they will receive exactly half of what a defined benefit plan would pay.

If you way was so smart, when IBM got nailed for age discrimination for screwing people over 40, why did all of the employees with a choice pick the defined benefit instead of your way. That my friend, is a real world example.

"Contrast this with a union pension plan. The assets there sit in a trust, they cannot be touched by creditors or by future corporate buyers in the event of a takeover. Believe me, you cannot get much more secure than that. There are even diversification rules.

Remember - they key to all this is taxation. If I have to give you something today because you got taxed on it today, then it is not a pension plan. It is immediate compensation.

J:
A suggestion - don't throw around words like "crap" unless you REALLY know what you are talking about."

Well, since I'm in a union, and my pension did disappear (I might get a few cents on the dollar from PBGC if they're still around then), and the company mysteriously was able to fund fairly lavish SERPs for dozens of senior execs immediately prior to bankruptcy, despite their inability to fund my retirement, I guess I'll just have to say my experience differs from yours. If I fully fund your retirement today and pay the tax on it for you, it's a pension - walking and quacking like a duck and all that. I'm still trying to figure out why when some Harvard MBA jackass runs my company into the ground and destroys it's pension plan along with Every. Single. Penney of shareholder value, that's just the breaks for me (and the shareholders), while a guy who wasn't worth minimum wage walks away with an eight figure "severance package". Sorry if I'm a little hot about this one Gazzer, but my personal experience left me with a bit of a bad taste.

J:
Sorry about your experience. I don't want to get into personal experiences, since I certainly appreciate that average workers lose when a company goes under.
Obviously, I don't know the particulars about your bankruptcy. However, I'll tell you that you can't just fund executive pensions prior to bankruptcy. So I'm not sure about that part of your experience.

There is a large body of law and of experience in this area. It boils down to the following:

1.The government does not like giving tax breaks on behalf of executives, so it restricts them in all kinds of ways.

2.Companies have to compete for executive talent. Therefore, they make sure the executives get the desired benefit one way or another.

In its crudest format, the executive does not get to enjoy a protected funded pension, but is taxed immediately (eg on receiving an annuity). Therefore the company pays him an additional "gross-up" payment to cover the taxes on both the base amount and on the gross-up.

The result?
For the people, we get to feel good that we've restricted tax breaks for the wealthy.
For the legislators, they get to posture.
For the executives, they get what they're worth, one way or the other.
For the company, they have to pay higher taxes.

In the end, the people didn't get what they thought they wanted, and the tax code is a little more complicated.

Same nonsense happened in the mid-90's when the gov't introduced a $1M salary cap. However, companies were able to tie compensation to performance. The result was an explosion in bonuses tiedto performance and stock options.

Be careful what you wish for.

J
Sorry to get technical.
If a company buys an annuity for you and helps you pay the taxes, it is *not* a pension.
It is in effect the same as paying you or me money so that we can go out and buy our own annuity.
The reason this is not as good as a pension is that the company has lost the tax benefits that come from a pension:
With a pension, the company gets to deduct the contribution today, it avoids taxes on the investment income, and the benefit is only taxable to you when it is paid out.
When you pay it out as immediate income, you've lost all that.
And as you point out, that's still pretty good to the executive. The only cost is to the company since this is more expensive to provide than a true pension.

"2.Companies have to compete for executive talent. Therefore, they make sure the executives get the desired benefit one way or another."

If I believed there was any talent involved I wouldn't have a problem with this stuff - it just looks like there's a lot of cronyism at the top of the exec ladder (our guy was hired by a search committee led by, you guessed it, another Harvard alum) that, by comparison, makes union seniority rules look like the personification of objectivist meritocracy.

In the case of my company, the tax break issue would, at least as I understand it, be moot, since we were losing money hand over fist.

I think you attribute a more populist attitude to me than I actually have - I don't want the government dictating how much companies pay anybody, including execs, though I do want to see those guys hammered when a company goes bankrupt, just like the rest of us were. Otherwise, it's not the Lee Raymond's who make me mad (I don't regard him as any different from a powerball winner, but that's another argument) - it's the guy the board insists on paying 500k-1mil/yr for consistently disastrous decisions.

"However, I'll tell you that you can't just fund executive pensions prior to bankruptcy"

Are you saying they can't fund a SERP, or is this an extension of your argument that a SERP is not a pension?

pearson, after 30 years of working for it and expecting it, with a corporation making 10 Billion dollars a year profit, there is NO reasonable expectation that a pension would disappear.

Er, no, they didn't make $10 billion dollars a year in profit. There you go again promoting the mentality that the corporation has bottomless wealth. The exact mentality that got them into the problem.

In your brilliance, please tell us where someone in their mid-50s goes to make up the 50% loss of expected income and make the additional money to cover healthcare?

They should NOT EXPECT IT IN THE FIRST PLACE. The unions demanded a health care fund that would be paid with FUTURE revenues rather than a separate, personal plan THEY would have control over. They expected someone else to care about their retirement just the same.

So for 25 years it was true and they delivered and now the last 5 years it's just too bad?

How long does a Ponzi scheme have to persist before it's "reliable"?

This statement shows you really don't' understand what is being lost here. If a person today contributed the max to the defined contribution plan they will receive exactly half of what a defined benefit plan would pay.

And your fradulent basis for asserting this is...?

If you way was so smart, when IBM got nailed for age discrimination for screwing people over 40, why did all of the employees with a choice pick the defined benefit instead of your way. That my friend, is a real world example.

I have no idea what circumstance you're talking about, but on the same matter, I'll add this:

1) DB pension plans that I've seen depend SOLELY on final salary, age, and years of service. Obvious problem? (Not obvious to you, I mean obvious to people who do their homework.) Funding the same pension for someone who works from ages 50-60 is a lot hard than funding it for someone who works from ages 25-35. And the plan doesn't account for this. Under this constraint, hiring someone over 40 BECOMES artificially costly.

2) If the benefits step up in sharp increments, as they do in many plans, like how the *day* you get your fourth year of service, your vesting goes from 60 to 80 percent, there are more perverse incentives. In *one day* the employer's obligations may jump by (roughly) $20,000 or so. That means the marginal cost of that day's labor shows up as at least $20,000. No one covered by the plan is capable of producing that much value in a single day. Firing them the day before the step-up makes perfect economic sense. It's not discrimination because it's well-grounded that way. So, explain to me why an employee wants such a plan again?

"Er, no, they didn't make $10 billion dollars a year in profit. There you go again promoting the mentality that the corporation has bottomless wealth. The exact mentality that got them into the problem."

Er no to you pearson, IBM has make between 7.5 and 8.5 Billion net income the last 3 years.

"And your fraudulent basis for asserting this is..."

People I worked with have runt he numbers, with their salary levels, and on these cash conversion they have lost 50% of their pension. Now a study has come out showing the same thing. Since you think you know everything, you look it up, you would just call it fraudulent if I posted it.

You have disproved your credibility when you say you don't know what I am taking about and then post 2 paragraphs irrelevance.

Nobody wants your plan. As I said, over a lifetime of work it will provide half the benefits of a DB plan. Secondly, that portability argument has been debunked by many studies showing that people never last the five years to be vested in those plans. IBM fires people at 53 to get rid of the oldsters and abut 4 1/2 on the young ones.

Now if you can't see anything wrong with that, you have made my point.

""However, I'll tell you that you can't just fund executive pensions prior to bankruptcy""

Wow where do you get this stuff? Delta execs walked away with 10s of million while the airline filed bankruptcy. Why do you think the pilots we reluctant to make concessions while management had theirs guaranteed?

"1.The government does not like giving tax breaks on behalf of executives, so it restricts them in all kinds of ways."

Right, like theuy are not allowed to backdate options.

"2.Companies have to compete for executive talent. Therefore, they make sure the executives get the desired benefit one way or another."

Talent, so how hard is to to make IBM stock or Home Depot stock drop 20% in 5 years while the market does not? Is that talent?

Mr. me:

Er no to you pearson, IBM has make between 7.5 and 8.5 Billion net income the last 3 years.

Well, making 20% less than $10 billion net is *different* from making $10 billion for 30 years straight.

People I worked with have runt he numbers, with their salary levels, and on these cash conversion they have lost 50% of their pension.

Well, if you were capable of clear thinking, you would note that a cash conversion from a DB is different from being DC the whole time.

Now a study has come out showing the same thing. Since you think you know everything, you look it up, you would just call it fraudulent if I posted it.

I *don't* claim to know everything. But if you think I'm going to lend any credence to a study you won't explain or even name, you're gravely mistaken.

Nobody wants your plan.

Yes, they do.

As I said, over a lifetime of work it will provide half the benefits of a DB plan.

No, it won't. Run the numbers yourself. Compare a contribution to an equity index over thirty years, vs. the pension from an employer's plan with the same contribution. Let me know how that one goes.

Secondly, that portability argument has been debunked by many studies showing that people never last the five years to be vested in those plans.

Never last the five years? What the hell are you talking about? You are always fully vested in a DC plan. It is always fully portably and under your control. (yes, with some exceptions, like matching contributions, but those restrictions expire on leaving)

IBM fires people at 53 to get rid of the oldsters and abut 4 1/2 on the young ones. Now if you can't see anything wrong with that, you have made my point.

I can't. READ the part of my post you JUST DISMISSED as irrelevant. It is precisely these defined benefit plans that create the perverse incentives for firing people before a benefits step-up. IT IS NOT DISCRIMINATION because a worker clearly does not produce enough value in one day to justify a step-up that occurs on that one day.

If you REALLY want ONE employer to have that freaking much control over you, to rip away your benefits when you get old, or declare bankruptcy before they can pay you, I'm sure defined benefit plans must look really hunky-dory.

me:
You seem to be lashing out at everything and everyone.
I'll grant that executive benefits, pensions and taxation is a very complex topic. I won't deal with all of your points.
However, I'll back up person in telling you that defined benefit plans are discriminatory IN FAVOR OF older workers. That is why it hurts them when companies switch to a DC plan. There is nothing inherently cheaper about a DC plan.
If two employers put the same fund contributions into a DB plan and a DC plan, over the long term, you'd get the same benefits from each one. Don't believe me on this, just ask any actuary you run into.

When an employer terminates a DB plan, they are cannot cutback benefits that have been already accrued. However, they can eliminate future accruals. Hence the preference for workers to remain in their DB plan after having invested their career with one company.

gazzer: I assume that when you say the same fund contributions to DC and DB get the same benefit, you mean the same contributions to the same investments. But that still strikes me as kind of a "if pigs could fly ..." statement. DB contributions are not going to occur in the same pattern as a DC. As time evolves, the "right" contribution to a DB will fluctuate sigificantly, while a DC is a lot more predictable. This volatility imposes real costs for the employer.

I see a lot of generalizing about DB plans - the truth is that there's enough difference in them that you'd have to be talking about a specific plan to really be certain about many of these statements. In my industry, the DB costs of hiring a 50 year old certainly weren't any higher than hiring a 25 year old, due to severe limitations on payouts to retirees who hadn't been around that long - indeed, in the late eighties that realization was part of an explosion in the hiring of employees in their mid 40s and older, something that had previously been unheard of in my business (have you figured out what I do yet Gazzer?).

While I disagree with the G about SERPs, I have to back him on the DB vs DC issue from day one - in fact, it's possible for the DC plan to leave you with more money. Among other things, the company may not be able to put money in the DB fund if it's "overfunded", and take it from me - just because a plan is overfunded now doesn't mean it won't vaporize before you need it. Either way, I can say from my personal experience that if you're starting your career now, you'd have to be out of your mind to agree to a DB plan over the alternative (unless you work for the government). If you're fairly young and covered by a DB plan, it might not even be a bad idea to support conversion.

J:
In fact, if I were a younger person, I'd prefer a company that had a DB plan. That's because my initial accruals under a DB plan would be worth little, and there is very little guarantee that it would be around in my 50's when the accruals start to become worth something.

gazzer - didn't you mean you would prefer a DC? Your reasoning supports that, not a DB.

The oil & gas industry is net short workers, both blue collar and white collar. Many of these companies are paying top dollars to minimally qualified workers to help meet global energy demand. The redundant auto workers should just change industries.

oops, I meant DC
thanks