Friday, November 21, 2008

The Crippling Burden of Legacy Costs: GM Is a Health Care Company That Sells Cars on the Side

The graph above shows the number of retired UAW members plus surviving spouses PER active UAW member at the Big Three (data here from the UAW). Doesn't this picture go a long way towards explaining the financial troubles of the Big Three, especially GM, because of the crippling legacy costs? In other words, GM has become "a health care benefits management firm that sells cars for a loss as a side venture."


At 11/21/2008 6:07 PM, Blogger Ironman said...

It could be worse. If you think about it, Harvard is really just a hedge fund that operates a private university.

At 11/21/2008 6:21 PM, Anonymous Anonymous said...

Well, this is how the older generation "steals" from the younger one. :)

You should post about the federal government's obligations, promises, debts, etc. to its old and not-so young.

Cheers for great posts.

At 11/21/2008 7:12 PM, Blogger Matt Young said...

I worked at Lockheed once, we were a vu graf company that occasionally delivered a bomb.

At 11/21/2008 7:24 PM, Anonymous Anonymous said...

The saddest thing about the auto industry is not the cost of the workforce - who will, without a doubt make additional concessions for the sake of saving the business but the incredibly poor management and bad economic decisions that it has been allowed to go on for so long. David Brooks of the NYTimes, I believe, called it crony capitalism.

There is no doubt that the big three will be forced into a Toyota type model as unions get blamed (once again) for demanding a share of the incredible profits that these companies generated when they were doing things right. The unintended consequence it that those retirees will end up as a legacy cost somewhere and we better be very careful what we wish for.

I believe that if we can last for two more months, we will see a wholly different approach, a sort of managed bankruptcy that would save the company, the employees, and the retired workers. Just until 01.20.09.

At 11/21/2008 11:44 PM, Anonymous Anonymous said...

GM Spends $17 Million Per Year on Viagra

Lifestyle drugs -- chiefly Viagra
-- are costing General Motors $17 million dollars a year and the cost is passed along to car, truck and SUV consumers. The blue pill is covered under GM's labor agreement with United Auto Workers, as well as benefit plans for salaried employees.

GM executives estimate health care adds $1,500 to the price of each vehicle but they do not break out how much of the premium is caused by erectile dysfunction expenses.

At 11/22/2008 10:32 AM, Anonymous Anonymous said...

Your GM chart gives us an early look at Social Security's predicament a few years from now.

At 11/22/2008 10:41 AM, Anonymous Anonymous said...

How's this for a bailout. Buy the company and turn it over to the retirees in lieu of their pensions and other benefits.

At 11/22/2008 5:52 PM, Anonymous Anonymous said...

@anon 10:41

lol, ya because they certainly know how to run a huge conglomerate...

At 12/05/2008 2:30 PM, Anonymous Anonymous said...

But, of these costs, are legacy payments to executives?

Waggoner is set to receive $4.6mil annually for his pension.

At 12/12/2008 10:35 AM, Anonymous Anonymous said...

Instead of band-aiding with multiple ballots, congress should require GM and Ford to fill chapter 11 with the understanding that the tax payers will pick up the legacy cost for companies. This will allow them to jetison UAW agreements and obligations to establish competitive wage rates that can allow them to become better equipped to earn consumer business.

At 12/12/2008 11:53 AM, Anonymous Anonymous said...

Retired workers gave 30-40 years of their lives to their employer with the promise of pension and health benefits in their old age. What are they supposed to do now? They still need to pay their house payments etc., buy food and medicine. Medical costs for older Americans can force them to choose between buying food and medicine. If we end up with universal health care, that could eliminate a huge cost for the auto companies without sacrificing medical care for the most vulnerable in our society. The idea that older people are stealing from the young is ridiculous. If we lose our pensions and health care, then our kids WILL feel that they need to help us, out of their pocket. Until the last half of the 20th century, kids DID take care of their elderly parents. Is that what it will come to, Anonomous, or would euthanasia be your preference?

At 12/12/2008 11:47 PM, Anonymous Anonymous said...

"or would euthanasia be your preference?"

It's a thought. Prolly less than $100 per legatee for the drugs, too. Less if we use bullets.

At 12/14/2008 8:10 AM, Anonymous Anonymous said...

The big three told workers that if they would agree to dedicate their lives to their company, they would in turn provide retirement and healthcare benefits after a pre-determined number of years.

This allowed them to ensure that they had a stable workforce at a time when sales were booming.

Instead of using some of the profits from those booming sales to fully fund those obligations as they were accrued (in safe government backed securities), they used the money for other purposes, including bonuses for managers whose job it was to plan for possible future risks like those they are now facing.

If you were told that part of your wages were to be paid at some future time (like your 401k), and then asked to give that up when you reached a stage of your life when you needed it the most, how would you feel?

Regardless of what anyone thinks about the retirement or health insurance plans of retirees (or what type of prescriptions their physicians feel will improve the quality of their lives), the truth is, they were told this was part of their compensation a long time ago, and it would not be right to allow those promises to be broken now!

At 12/23/2008 9:19 PM, Anonymous Anonymous said...

For the retirees: 1) don't put all your eggs in one basket, 2) don't believe what people tell you and 3) get another job.

For the management critics: 1) does anyone know the actual cost of large bonuses to the company?
2) Does anyone know the added cost per vehicle due to government regulation?

At 12/24/2008 12:35 AM, Anonymous Anonymous said...

I find it rather amusing that no one ever asks how much the executive compensation of GM's 32,000 salaries, non union workers goes into the cost of an American vehicle.

I recently read that 20 percent of GM's total costs are the result of non salary compensation to salaried workers, and come close to the total annual legacy costs for millions of UAW autoworkers.

The figure given in one of the business magazines was 1.5 billion dollars a year in various benefits and stock options paid out to 32,000 white collar executive and management people. Compared to the several million retired autoworkers this is far more of of a problem for the American automobile industry. The CEO of GM received over a 64 percent increase in salary alone in 2007-2008. In 2004 his total compensation was a bit over five million. This year it approaches close to 15 million.

That is nothing. AIG during the hearings for its bail out, suggested that they reduce their "year end bonuses" for the top ten percent of their management personal to 70 percent of the usual bonus if they received bail out money from the federal government. The government insisted that they could not take "year end bonuses" using the tax payers dollars. Their solution was to simply change the name of the bonus from "year end bonus" to "retention bonus" The average bonus was 4 million dollars.

AIG has 70,000 employees and 7,000 of the top salaried executives and managers received these "retention bonuses". The lowest of these bonuses was one million dollars, and because of the fiscal crisis, these "rentention" bonuses were only 40 percent of their usual year end bonuses.

When this was discovered,just a few days ago, Andrew Cuomo started an investigation. The first thing he has discovered was that the recipients of these bonuses were told that they were to be kept very,very secret.

When you hear GM executives fudge the total compensation of UAW workers, stating that the salary and compensation of an auto worker today is 71 dollars an hour, no one asks how they arrived at this figure. They get it by tacking on the cost of retirement benefits of UAW workers who are already retired onto the hourly salaries of current employees.

The average salary of an UAW autoworker today is about 26.78. Health care costs for these workers is average for most workers who get employer based health care, about seven dollars an hour, and their pension costs are another six dollars an hour.

UAW non salary benefits come in at about one third of their salary, which is average for all employers who provide such benefits for their employees. The average salary is 26.78, the total benefit costs are about 13 dollars an hour for a grand total of about 41 dollars an hour.

Neither the average salary of a UAW worker, nor their total remuneration with benefits, is not excessive. Its only about 20 percent higher than the median salary and compensation for the average American worker.

The exxecutives and management of GM and other American auto companies have engaged in a good deal of shameless distraction in order to divert attention from the real drain on the automobile industry's ability to keep afloat, and that is a virtual unlimited amount of compensation that non union, white collar employees for the auto industry receive. When the annual benefits for a small percentage of the entire work force of an American automobile company, a few tens of thousands can come close to equaling the benefits of nearly a million workers, the problem does not lie with the compensation given to the average auto worker, nor their average salary of 56,000 dollars a year, but rather with the millions and tens of millions of dollars given as compensation for a rather much smaller group of managers.

Before 1980, the total amount of executive compensation that could be deducted as a legitimate business expense, was 25 times the total compensation for the lowest paid employee working for the company. That is to say, if a CEO wanted to have his own salary raised he had to raise the salaries of everyone working for the company to keep that ratio, or the company had to eat the amount that went beyond that ratio when it came to filing taxes.

In 2007, immediately after taking the majority in Congress, Democrats attempted to reimpose these limits. These limits do not tell a company that they cannot give an executive a salary beyond that ratio, merely that anything beyond it cannot be considered a legitimate deduction with regard to the company's taxes. Of course the Republicans threatened a filibuster, and the bill died.

Since 1980, executive compensation has been completely decoupled from employee wages, and as a result, executive compensation has skyrocketed from an average of 17 times the average American workers compensation, to over 450 times the average American workers compensation.

The largest excuse for this is to "incentivize" the executives.

There is no such concern when it comes to "incentivizing" the American worker.

At 4/02/2009 4:50 PM, Anonymous Anonymous said...

why doesn't anyone talk about the legacy costs to the white collar worker especially the executives. About how much in pensions they receive....and when they die, how much their spouses get.
Or how about the 400 Vice Presidents on staff at GM.
And did anyone ever figure out that these $$$million dollar$$$ chiefs make about $13,000/hour. Time to wake up.


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