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    Highlights for week ending March 15, 2003
  • According to "i_be_mad_as_heck", 33% of IBM's 2002 Earnings came from its Pension Trust Fund. Excerpts: "For 2002, $1.199 Billion was claimed from worldwide for net periodic pension income (vapor profits). That amounts to over 33% of the total earnings for the year of $3.579 Billion. The reason they are called 'vapor profits' is that the funds cannot be taken out of the pension trust fund. They are only used for accounting purposes for calculation earnings. The real pension fund had no 'profits', since the value went down. Since IBM contributed cash and stock to the pension fund last year to get it up to the minimum fully funded requirements, they are allowed to use this method of accounting."


  • New York Times: What if a Pension Shift Hit Lawmakers, Too? Excerpt: "As members of Congress prepare to reform the pension system, they might want to think hard about the proposals on the table. A new study has examined what would happen to their own retirement benefits if the changes that some favor for other workers were applied to them. The answer might give them pause. Virtually every senator and representative would lose out, the study found — in some cases by hundreds of thousands of dollars — if their current Congressional pensions were switched to a controversial variant called a cash-balance pension. One big loser, for example, would be Representative Rob Portman, a major sponsor of the House Republicans' pension legislation. He had built up a pension benefit worth $337,857 by the end of 2002, if taken as a single payment, the study found. But if Mr. Portman had instead earned his benefits under a cash-balance plan, he would get $239,185, based on an age of 48 and 10 years of service." If link is broken, view Adobe Acrobat version [PDF--24 KB].


  • Dow Jones Newswire: House, Senate Dems Object To Proposed Tsy Pension Rules. Excerpt: "A group of 24 House and Senate Democrats sent a comment letter to the Treasury Department Friday outlining their objections to proposed rules designed to make it easier for companies to convert traditional pension plans into 'cash-balance' pension plans. The lawmakers, led by Rep. George Miller, of California, the top Democrat on the House Education and Workforce Committee, wrote that they 'strongly urge the Department of Treasury to withdraw its proposed regulations pertaining to cash-balance plans.'"


  • Poughkeepsie Journal: IBM chiefs received big pay in '02. Excerpts: "Last year might have been a down year for sales and profits at IBM Corp., but Samuel J. Palmisano's performance as the newly-minted chief executive earned him a raise. Palmisano earned a hair under $7 million last year, including salary and bonus, said IBM's 2002 annual proxy filing with the Securities and Exchange Commission Monday. The 51-year-old lifelong IBMer earned $6.4 million in 2001. ...both Palmisano and Gerstner were praised by IBM's board of directors for their performance in 2002, when IBM had sales drop 2.3 percent to $81.19 billion and profits slide 53.7 percent to $3.58 billion. IBM shares fell 36 percent last year to finish 2002 at $77.50." ... "Last year was tumultuous for IBM, which employs more than 11,300 in Dutchess County. IBM shed 15,600 jobs and sold to Hitachi the hard-disk drive business its scientists invented." ... "Gerstner -- who took home $127.7 million in 2001, thanks primarily to hefty stock option exercises -- earned $23 million."
    • "tomofsnj" comments. Full Excerpt: "Sam's 44% salary increase must have come as a real inspiration to the regular employees. How many regular employees got canned to pay for the big bonus? It is interesting that the stock has dropped form 120 to below 80. I guess Sam would have gotten 10 million if he got IBM into chapter 11. It is amazing how bad the pay of American management has become. One would think that we have a wonderful economy with lots of good things happening. What we have is overpriced ceo of corporation with pension fund problems."


  • Wall Street Journal: IBM Chief Palmisano Earns Much Less Than Predecessor. Excerpt: "Last year, Mr. Palmisano oversaw IBM's steepest earnings slump in a decade, laid off some 15,000 workers, sold the Armonk, N.Y., company's disk-drive business and oversaw big acquisitions in the services and software arenas. Mr. Gerstner spent much of last year writing and promoting a best-selling book about the IBM turnaround called Who Says Elephants Can't Dance. Mr. Palmisano has been widely expected to take lower compensation. A 51-year-old IBM lifer, he doesn't have an employment contract, unlike Mr. Gerstner, who was recruited from the top job at RJR Nabisco Holdings Inc."


  • Business Week: The New Blue. Lou Gerstner saved Big Blue. Now it's up to new CEO Sam Palmisano to restore it to greatness. Excerpt: "If that sounds like the IBM of old, that's exactly what Palmisano is hoping for. The flattening of the organization, the lowering of CEO pay, the emphasis on teams -- it's all part of his broad campaign to return to IBM's roots. Palmisano believes that core values remain in what he calls the company's DNA, waiting to be awakened. And he thinks that this message, which might have elicited chortles during the tech boom, resonates in the wake of the market crash and corporate scandals. More important, he believes that only by returning to what made IBM great can the company rise again to assume its place of leadership in America and the world." If link is broken, view Adobe Acrobat version [PDF--38 KB].
    • Business Week graphic: IBM's Bold Bets.
    • Business Week graphic: Blueprint for Big Blue. Excerpt: "Squeaky-Clean Finances: Palmisano is quieting criticism of IBM's accounting practices. He has allocated $4 billion to fully fund the U.S. pension plan. IBM is also paying more in taxes. Says Sam 'Write about somebody else. The pension is funded, the tax rate is up.'"
    • Business Week graphic: The Evolution of E-Business on Demand.


  • Business Week: Q&A: "We Have Reinvented Ourselves Many Times". Excerpt: "Q: When I spoke to Linda Guyer, the head of the IBM Alliance, the worker rights group at IBM, she said money is the king of everything now, loyalty means nothing. They have a number of concerns. One of them is: They would like more flexibility on mandatory overtime. A: They don't want to work overtime, they don't have to work overtime. In services, you have a choice. You know, but if the work needs to get done, you might consider it an opportunity to work overtime. There's countries in the world that say that you shouldn't work more than 33 hours a week, 35 hours a week. I mean, that's wonderful, but it's hard to be successful in the IT industry working 35 hours a week. [At this point, Palmisano's face turns red. His voice rises. And he pounds the table twice to emphasize his point.] We are what we are. We're in a crazy industry. And when you're in this industry, you've got to bust your ass to win. And we're going to bust our ass to win. I don't care what the s--- she says. Right?"


  • "ignatz713" comments on IBM's new retiree medical plan, the Future Health Account (FHA). Excerpt: "The FHA is, without a doubt, one of THE most ingenious, diabolical plans I have ever seen, short of NO retiree medical in other companies. An employee MUST make it to age 55 while still employed, once retired, they MUST buy coverage from IBM, at whatever price the company store charges, and from all the indications of the people on this board, it WILL run out before we are 60. WHEN WE NEED coverage most. So, we most likely will be on our own until Medicare kicks in, and, AND to me the most important is that WE WILL HAVE NO PRESCRIPTION PLAN after we are on Medicare."


  • New York Times: Documents Detail Big Payments by Drug Makers to Sway Sales. Excerpts: "Medco Managed Care, one of the largest managers of prescription drug plans, was paid more than $3 billion in rebates in the late 1990's from drug makers seeking to promote sales of certain drugs, according to documents filed in a long-running class-action lawsuit. The documents, which open a window on the secret deals that drug plan managers have with pharmaceutical companies, state that Medco received the rebates as incentives to promote some of the world's most expensive drugs. Medco, a unit of Merck & Company, then persuaded doctors to prescribe those drugs to patients at the expense of similar medicines that often cost less, according to the documents, which were filed by plaintiffs in the case."
  • ... "Employers use drug plan managers in an effort to reduce their health care costs. But the plaintiffs in the lawsuit and other critics of the drug plan managers say that while the plan managers sometimes save money for employers, the deals they strike with drug makers actually help to drive up health care costs for employers and consumers." (Editor's note: Medco manages IBM's prescription drug plan).

  • vnunet.com: Microsoft tops best UK employer poll. Excerpt: "Microsoft is the UK's top employer, according to this year's '100 Best Companies to Work For' survey in The Sunday Times." ... "According to the survey 93 per cent of Microsoft staff feel proud to work for the company and believe that 'it makes a positive difference to the world [they] live in'."


  • The Cooper v IBM lawsuit pertaining to changes IBM made to its pension plan is obliquely referenced in Footnote O (Contingencies and Commitments) of the IBM annual report. The annual report is available on the SEC Web site at this location. Extract:

    The company is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business, including actions with respect to contracts, IP, product liability, employment and environmental matters. The company is a defendant and/or third-party defendant in a number of cases in which claims have been led by current and former employees, independent contractors, estate representatives, offspring and relatives of employees seeking damages for wrongful death and personal injuries allegedly caused by exposure to chemicals in various of the company's facilities from 1964 to the present.

    In addition, the company is a defendant in a class action challenge to its defined benefit plan. The suit alleges that the current pension plan formulas violate a number of Employee Retirement Income Security Act (ERISA) provisions including the ERISA age discrimination provision.

    While it is not possible to predict the ultimate outcome of the matters discussed above, given the unique factors and circumstances involved in each matter, historically, the company has been successful in defending itself against claims and suits that have been brought against it, and payments made by the company in such claims and suits have not been material to the company. The company will continue to defend itself vigorously in all such matters and believes that if it were to incur a loss in any such matter, such loss should not have a material effect on the company's business, financial condition or results of operations.


    View information on the Cooper v IBM lawsuit.


  • CNN/Money: U.S. jobs jumping ship. Cheap offshore labor is not just for manufacturing any more -- is your job heading overseas, too? Excerpts: "As painful as February's big job cuts were, what's even more painful is that many of those jobs are never coming back, as U.S. employers in a wide range of industries move more and more jobs overseas." ... "'By 2004, more than 80 percent of U.S. executive boardrooms will have discussed offshore sourcing, and more than 40 percent of U.S. enterprises will have completed some type of pilot or will be sourcing IT (information technology) services,' Gartner Inc., a technology consulting firm, said in a study late last year."


  • Andy Lang, a well-known pension actuary and former Principal at Towers Perrin, writes a letter to the Internal Revenue Service to comment on the U.S. Treasury's proposed regulations that would legalize cash balance pension plans. Andy's letter is long, but is a must read.


  • "wantedtoretire" summarizes the letter he wrote to the IRS regarding Treasury's proposes regulations. Excerpt: "Cash Balance supposedly aids younger workers. In fact it hurts them also by only considering their lower current salaries at a ridiculously low interest rate. Furthermore, if the employee leaves before 5 years of service there are no benefits."


  • In an ironic twist according to Janet Krueger, "one of the plans that is more clearly labeled illegal by the proposed Treasury regulations is IBM's 1995 pension equity plan. So IBM is right out there lobbying with us against the regulations, although for entirely different reasons." See the Dow Jones Newswire article "Companies Form Coalition To Protest Pension Reform Plan." Excerpts: "Watson Wyatt Worldwide, a benefits consulting firm and actuary, helped organize the coalition, which was announced this week. Calling itself the Coalition to Preserve the Defined Benefit System, the group said it plans to send a letter to President Bush protesting the reform plan. What the companies object to is a plan the U.S. Treasury Department proposed in December aimed at preventing age discrimination under cash-balance pension plans. Specifically, they don't like a numerical formula that would have to be applied to all kinds of pension plans, not just cash-balance plans, as part of the proposal."

 

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