Mad Dog 21/21: Vow Tipping
November 15, 2004 Hesh Wiener
You may have heard this story. Fraternity guys go into a pasture and quietly approach a contented cow that’s asleep on its feet. They line up on one side of the cow and push it over. You may also have heard about the corporate executives who quietly approach the benefits package provided to their underlings, lean with their authority on the pension benefits of people who might as well be asleep, and knock them down. The company’s balance sheet gets stronger, and its shares rise.
Cow tipping, like snipe hunting and jackalope watching, is a rural myth, a countryside counterpart of the urban myth. But pension trimming is a very real aspect of corporate conduct, and a controversial one at that. IBM has been in the middle of one of the most prominent disputes about pension benefit changes, because it cut deeply into the package many employees were counting on. In return, the company garnered approval from analysts who focus on the company’s balance sheet and bottom line and disapproval from quite a few employees who depend on IBM’s pension scheme.
The employees took IBM to court and have won some key battles in their effort to claw back some of what they say they lost as IBM rejiggered its retirement benefits. As it stands, it looks like part of the monster class action suit has been settled once and for all, while another chunk of it is still in dispute. The settlement means IBM will have to pay a tidy sum to the potential pensioners and their lawyers. The unsettled portion of the complex suit involves even more money, sums measured in hundreds of millions of dollars and, possibly billions of dollars, so you can be sure both sides have been fighting pretty hard.
The impact of the suit is not confined to the roughly 130,000 or so parties to the class action against IBM. It is not limited to IBM’s shareholders, either. The way this battle turns out will affect other pensioners whose employers trimmed benefits much the way IBM did, and their employers’ shareholders, too. Yet that’s only the short list of who wins and who loses as changing business and social conditions erode the generous retirement benefits that were once a prominent part of life in big, successful companies across the USA and around the world.
The broader impact of the Pension Wars will spread almost without limit, as employees reciprocate for their employers’ policies by thinking differently about their own best interests. At risk will be the employee loyalty that, like cushy pensions, typified big business at its best. And wherever employee loyalty goes, customer loyalty may well follow.
Unlike practical jokers in the countryside who can fool an ignoramus from Paramus once at most, corporate employees who see one big company after another trimming back on pensions may get fooled twice or more. The first time would be when they are caught up in the kind of change that the litigating IBM employees are trying to mitigate, and the second would be if the Social Security system is changed in ways that seem to benefit the taxpayers (who in this matter would be analogous to corporate shareholders) at the expense of retirees of modest means (who in this matter would be in the position of typical low- and mid-level employees relaying on pensions after retirement).
At the end of September, when IBM settled a part of the case brought by the 130,000 litigants for $320 million, or under $2,500 a head (from which the plaintiffs’ lawyers will presumably extract their modest fees), the company didn’t say much. The remaining portion of the case could cost IBM an additional $1.4 billion, according to most newspaper accounts. That’s less than $11,000 a head if it’s spread across the same 130,000 plaintiffs, again subject to vigorish for the lawyers.
The basis on which IBM’s adversaries might win is not that IBM did something illegal when it switched its pension plans to what is called a cash balance scheme from what is known as a defined benefit pension arrangement. IBM has the legal right to adjust its pension plans within broad limits. Where IBM may have exceeded its legal authority is in coming up with a new scheme that was unfair. Specifically, IBM apparently didn’t do all its math because the plaintiffs were able to demonstrate, undoubtedly with the help of computers and maybe even IBM computers, that the revised pension plan was particularly tough on older employees compared to younger ones. That, it turns out, is age discrimination, and the lawyers are seeking the sum they calculate is what it would take to even out the impact the new plan has on employees of all ages.
If $320 million here and $1.4 billion there seems like a lot of money, it is. But it has to be seen in perspective. Financial analysts already know that the sums involved are not monumental, at least not in terms of the kind of money IBM has.
In October, IBM earmarked $4 billion for stock buybacks. The company’s board had already approved another $4 billion buyback in April, bringing the total for this year to $8 billion. If IBM uses all this money, which it most likely will not, the total cash consumed would amount to more than four times the $1.72 billion it reportedly stands to pay as a result of the retirement suit.
The point here is not that the IBM board seems pretty quick to write a check for buybacks that boost the company’s earnings per share or that it suffers from acute arthritis when it has to sign a smaller check that goes to employees. That may be the case, but if what is done is in the best interest of IBM as determined by the company’s directors, well, that’s what corporate governance is all about. What is at issue here is what IBM says about itself as it pursues, with all the best intentions, what it sees as its strategic goals.
The message seems to be that this is a different world from the old one in which IBM (and other big companies, but particularly the most prestigious ones) offered hire-to-grave security to all worthwhile employees. IBM, adjusting to the new climate, had to change. This is strikingly different from the way it used to be, a time when IBM, among other great companies, made things change and the rest of the world could at best try to imitate Big Blue and its ilk.
Microsoft, until not so long ago for sure and perhaps even now, has made life easy, in financial terms at least, for all the early employees who stuck around and many not-so-early ones and it might be doing a better job than IBM with recent and relatively recent hires.
It turns out that the only corporate employees who seem to be relatively safe when it comes to pensions are the ones in strong unions. This is not lost on the handful of IBMers who are affiliated with Alliance@IBM, local 1701 of the Communications Workers of America.
It seems unlikely that the CWA will be able to gain much ground within IBM, particularly now that the pension dispute, which might have ignited any union kindling lurking in the vast forest of IBM employees, is well on its way to some kind of resolution. If IBM ever gets unionized, it’s going to be by a union in India with the right political affiliations, not a CWA local in Endicott, New York, the company’s nearly abandoned founded headquarters from nine decades ago. IBM employees, from the company’s beginnings as Computing-Tabulating-Recording to this very day, are more likely to believe in cow tipping than to anticipate vow tipping. They are, after all, very much like you and me.