End of the Line for Generous Motors?

February 16, 2006

It used to be conventional wisdom in American business that “Generous Motors” offered the richest benefits around. GM was an enormously rich company back in the 1950s and 1960s, and GM’s top management used the company’s wealth to attract and retain talent.

Fast-forward 50 years, and the old regime at GM has fallen into disarray. The rich benefits put in place decades ago are now fading into history as the company grapples with the challenges posed by an era of aggressive competition and globalization.

In one of the biggest blows to the old regime, GM chairman Richard Wagoner, said GM will follow the lead of corporate giants such as IBM and Verizon, and will change the way pension benefits are calculated for active salaried employees hired before 1993.

Wagoner said GM still is evaluating ways to restructure salaried pension benefits in the U.S. But he left no doubt that big changes are in the works, including a cap on pension benefits for existing employees that would make them significantly less generous.

 

“We have decided to substantially alter the pension benefits for current U.S. salaried employees so that we can provide a competitive and fair benefit but also reduce the financial risks to GM,” Wagoner said. “While we will announce specific details early next month, we intend to freeze accrued benefits in the current plan and implement a new plan for future accruals which could include a defined contribution or cash balance plan,” he said.

 

The announcement effectively ends the defined-benefit pension plans at GM, which date back to the 1940s and 1950s. Last year, GM also notified salaried employees that the company was no longer making contributions to individual 401Ks.

Wagoner said the pension changes would not affect current retirees or surviving spouses who are drawing benefits from GM’s Salaried Retirement Program. However, GM is capping contributions to salaried retiree healthcare at 2006 levels, meaning retirees will share more of the costs in the future. The cap on healthcare benefits will take effect next January and will affect anyone eligible for benefits through GM’s salaried post-retirement healthcare.

 

A difficult decision?

 

“This is a difficult but necessary decision and it was made only after the greatest deliberation,” said Wagoner.

“A number of other U.S. companies have already taken similar action in the face of these rising costs and increasing global competition,” Wagoner noted. “In particular, U.S. healthcare costs continue to rise at high rates. When these benefits were conceived decades ago, no one could have foreseen the explosive cost inflation that we have been experiencing in recent years. These costs are simply not sustainable,” said Wagoner, who also announced GM was cutting his annual salary by 50 percent and cutting shareholders’ dividends by 50 percent.

Wagoner, however, ruled out for now at least, an across-the-board pay cut for GM salaried employees, noting the company is already paying market-level salaries to engineers and marketing specialists.

“These are difficult decisions that involve sacrifices by our employees, stockholders, retirees, and the senior leadership team,” Wagoner said. “However, we are confronting a dramatic change in our industry and in the global competitive environment, and that requires us to look for additional ways to reduce financial risk and improve our competitiveness for the long term.”

Wagoner also said he believes the cuts will survive any court challenge.

“We’re very comfortable these things are permissible under the law,” he said.

“What we’re finding is most of the other countries that compete in the industrial sector have different benefit structure where a significant part of the costs are paid in national systems,” he said. “We’re now subject to global competition and we’re running against competitors that don’t have the same burdens,” he said.

 

The pension and healthcare plans of GM’s 350,000 blue-collar retirees are currently protected by union contracts that expire in 2007. They are certain to become a target of intense negotiations between the giant automaker and the UAW then.

 

Wagoner’s actions left little doubt that he was trying to impress upon union members the need for GM to scale back on past promises and commitments.

The changes follow months of turmoil at GM, which lost $8.6 billion in 2005 and in November announced plans to close nine manufacturing and assembly plants and eliminate 30,000 jobs by 2008.

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