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    Highlights—January 8, 2005
  • National Bureau of Economic Research: Earnings Manipulation and Managerial Investment Decisions: Evidence From Sponsored Pension Plans [PDF--50 pages, 406 KB]. Excerpts: Manipulation of reported earnings can be a powerful tool for managers to inflate their stock prices. Studies of earnings manipulation typically emphasize aggregate measures such as accruals and, consequently, struggle to link earnings manipulation to investment decisions. In this paper, we identify a simple mechanism for earnings manipulation, describe how manipulation through this channel is linked to CEOs’ incentives, and show that firms change investment decisions in order to justify, and capitalize on, this type of earnings manipulation. Specifically, we find that managers opportunistically choose assumed rates of return on pension assets, and we examine how these distorted reporting decisions interact with option exercises, merger activity and asset allocation decisions within pension plans. [...]
    Some capital market observers have viewed the actions of IBM, under CEO Louis Gerstner, Jr., as an example of how firms can use pension accounting to manipulate earnings. IBM sponsors a large defined benefit pension plan, with over $57 billion in assets at the end of 2002. Table 1 outlines the operating performance of IBM, the performance of its DB pension plan, and the CEO’s option grants and exercises. Changes in the long-term rate of return (LTROR) that IBM assumes on its DB pension plan assets are of particular interest. IBM changed its assumed long-term rate of return four times during this period: a twenty-five basis point reduction in 1995, a twenty-five basis point increase in 1997, a fifty basis point increase in 2000, and a fifty basis point reduction in 2002. As we describe more fully in the sections that follow, IBM’s assumed rates of return throughout this period exceeded those used by most firms. The frequent changes are also notable given the long run nature of these assets and assumptions.
    While IBM reacted to poor actual performance in its pension plan in the mid-1990s by reducing the assumed long-term rate of return, the opposite occurred in 2000. Despite poor equity market returns and declining bond yields during that year, IBM raised its long-term rate of return assumption by fifty basis points. Nearly five percent of IBM’s income before tax in 2000 and 2001 resulted from the increase in the assumed long-term rate of return from 9.25% to 10.00%. More generally, IBM’s reported pretax income grew at a compound annual growth rate of 6.7% from 1995 to 2001; without these changes, income would have grown at only a 5.6% rate. As Table 1 shows, these changes in pension assumptions coincided with deteriorating operating performance. This example illustrates how senior managers can use pension accounting to boost their firms’ reported profits. [...]
    We conclude by framing our investigation of earnings manipulation within the debate on whether earnings manipulation reflects an agency concern or is beneficial to current shareholders. We show that managers who are the least constrained by their shareholders — as measured by an index of corporate governance — appear to be the most aggressive with their rate of return assumptions. This evidence suggests that the earnings manipulation investigated here does not benefit current shareholders. We go on to speculate on the magnitude of these effects by returning to the case of IBM. We estimate that between $12 and $76 million of compensation accrued to Gerstner from these changed assumptions alone.
  • "madinpok" comments on the impact of IBM's 1995 and 1999 pension formula changes. Full excerpt: In ibmpension@yahoogroups.com, keep_ur_promises wrote: "I sometimes wonder if folks realize that the hosing they got over the 1995 PCF changes was every bit as bad (for many) as the one everybody got over the cash balance switchover." Yes, the PCF plan cut the pension of a person who retires after 30 years of service by about 25%. Under the S&E plan, they would have received 40.5% of their final average salary. Under the PCF plan, that dropped to about 30% of F.A.S.
  • Mercer Human Resource Consulting: Mercer intensifies efforts on hot US pension policy issues for 2005. Excerpts: Cash balance & other hybrid plans. First, Mercer believes that any age discrimination or other legal restrictions on these plans should apply only for the future. Employers that adopted hybrid plans in the past did so based on the fact that, among other things, the IRS was issuing determination letters for these plans and had addressed these plans in regulations. Our recommendations include: * clarifying that hybrid plans are legitimate designs; * lifting the freeze on determination letters for hybrid plans; * addressing concerns about benefit “wear aways”; and * allowing full flexibility for employers to terminate and modify defined benefit plans for future service.
  • New York Times: Labor Board's Critics See a Bias Against Workers. Excerpts: The rulings of the National Labor Relations Board have poured out one after another in recent months, with many decisions tilting in favor of employers. The Republican-dominated board has made it more difficult for temporary workers to unionize and for unions to obtain financial information from companies during contract talks. It has ruled that graduate students working as teaching assistants do not have the right to unionize at private universities, and it has given companies greater flexibility to use a powerful antiunion weapon - locking out workers - in labor disputes. And in a decision that will affect 87 percent of American workers, the board has denied nonunion employees the right to have a co-worker present when managers call them in for investigative or disciplinary meetings. [...] Several recent board decisions, Mr. Johnson pointed out, have reversed Clinton-era rulings that overturned precedents set by Republican boards. In a case involving I.B.M., the board voted 3 to 2 to overturn a Clinton board ruling that gave nonunion workers the right to have a colleague accompany them to investigative or disciplinary meetings with supervisors. The Clinton-era ruling was a reversal of a 1980's decision.
  • CNN/Money: IBM to pour $2.5B into upstate N.Y. Big Blue to lead a consortium of firms to build state-of-the-art semiconductor plant along Hudson. Excerpt: Gov. George Pataki of New York is set to unveil plans Wednesday to boost the economy of the Hudson River Valley with more than $2.5 billion in high-tech investments from an IBM-led group, the plan's backers said. Big regional employer IBM, together with top customers Sony of Japan, California-based AMD and Infineon of Germany, have pledged $1.9 billion to build the centerpiece of the project -- a new semiconductor plant at IBM's existing Fishkill, N.Y. facility. The regional investment consortium will be unveiled during Pataki's annual state-of-the-state speech, his eleventh as governor, according to a statement from the governor's office.
  • Jim Hightower: The CostCo Model. Excerpt: Costco is different... and that really POs Wall Street. The nationwide retailer treats its 100,000 clerks, forklift operators, and other workers as valued assets to be invested in and nurtured – unlike the Wal-Mart model of paying the least you can to rank & file employees, squeezing the last ounce of toil out of each of them, busting any whisper of unionization, and causing a workforce turnover like employees are nothing but disposable coffee cups. How different is Costco? Starting pay is $10 an hour, workers typically earn $40,000-a-year after three years on the job, the company covers 92 percent of employees' health care costs, and the Teamsters union provides strong bargaining representation for the workers. Also, while CEOs at other major corporations average 531 times the pay of their lowest-paid employees, Costco's top boss takes only 10 times the pay of his typical rank & filer. His annual salary $350,000 – compared to some $5 million a year hauled off by Wal-Mart's honcho. "From day one," says the chief financial officer at Costco, "we've run the company with the philosophy that if we pay better than average, provide a salary people can live on, have a positive environment and good benefits, we'll be able to hire better people, they'll stay longer and be more efficient." It works. Costco's turnover is minimal, its profits are consistently strong, and its stock price has quadrupled in 10 years.
  • In "Where the Hell is Congress?" "ibmmike2006" comments on the IBM pension situation. Full excerpt: Thoughts while thinking, if you can believe that. We all know that US Corporations are ripping off pensions that are valued at one sixth of the total accumulated wealth of the US at about $10.3 Trillion, second only to the accumulated value of homes at $10.7 Trillion. Yes that is Trillions of dollars. Pensions came about, after WWII as a way to fund retirement, when people are alive but not able to work and needed money to replace the lost income of not being able to work. It was a trade off, taking lower wages in return for a defined benefit pension for life. In case you are wondering, 61% of people age 65 are NOT working, not that they don't want to, it is just most can't for various reasons. Forty-five percent of those age 65 to 70 have a disability and can't work full time. Unless of course, you happen to be an executive and did not do much manual labor or activities like a Customer Engineer who squatted for hours on end behind a 360 CPU reading logics whose knees are shot.
    With the "ripping off of pensions" that is running amok in the Fortune 500, where is Congress? There seems to be a voice in the wilderness, Bernie Saunders, but then he is considered a Socialist by his fellow Congressmen. We all know what happened to those "Socialist" guys. I think Bernie is a great guy.
    When I discuss things like pensions with my Conservative Republican Senior Senator, he gives me a sympathetic ear and then says, I understand how you feel but Corporations simply cannot afford pensions. This is from a guy who will leave Congress, maybe with about 100% of his Congressional salary for life. But, he just keeps running, and getting re-elected and continues to sponsor bills pro-executive and anti employee who represent the majority. He seems to be a "minority" special interest Senator who considers the wealthy "his base" or "Foundation" of support.
    In the case of this board, all we want is what was deferred for 30 years or more with a tax write off that the IBM Executives have found a way, thanks to the teaching of Carlyle's Louie Gerstner Jr, who has taught guys like Sam and the other IBM executives Greed and how to "Make some money" that borders on theft. Theft of deferred income, that IBM took as a tax writeoff for decades set aside for its employees only to transfer to their SERP. In case you have not looked at that in last year's proxy, Sam will be taking home about $677,000 a month for life, just from that fund. Now couple $20,000,000 million a year with stock options, salary, bonus, and EDCP it is absolutely outrageous. If you haven't checked out their ages, they all will retire at age 60 in this decade. Sam will take out via the SERP about $300,000,000 over a 25 year period - age 60 to 85. How is IBM going to be able to fund that kind of money? With the estimated 3,000 IBM Executives who are covered under SERP ranging from $500,000 a year to $12,500,000 a year that qualifies for SERP, where it all that money going to come from? Maybe, the missing $18,000,000,000 from the overfunded Pension Trust fund surplus is funding the SERP, anyone know? This might be a good question to ask at the upcoming stock holder meeting.
    How many hours of billable work will have to be performed to pay for that $677,000 a month for life of Sam Palmisano? At $250 an hour, it's about 2,793 hours, 80% billable of 168 hours a month and that is 134 hours billable, divided into $677,000 means 20 billable service providers. In the 19th Century, they called em slave masters. Money is easier to handle than having a slave today I guess.
    Besides Congress, where are the stockholders and specifically the senior retired IBM executives? Have they ALL cashed in their IBM stock? Were they paid off in June 1998 to be silent? It would be interesting to see if they have sold it all. I see lots of wheel spinning and frustration and wonder if, besides lawsuits, if there might be another avenue to prevent Pension Theft by the Fortune 500? Anyone got any ideas? I can only think of one, increase the testosterone levels of retirees so they can show some back bone.

Vault Message Board Posts
Vault's IBM Business Consulting Services message board is a popular hangout for IBM BCS employees, including many employees acquired from PwC. Some of this week's posts follow.
  • "Some Additional Thoughts" by "Dose of reality". Excerpts: I think there still are pockets of appreciation for good technical skills on the front lines, but the problem is that the centers of power in finance are clueless about the marginal value of a seasoned 20 year veteran vis a vis a recent graduate from the University of Calcutta. All they can see is the cost differential, but they don’t have any idea about the impact on marketability or client appreciation. We plan and manage by the numbers, not by the market economics – this is probably the biggest driver of our flawed resource and comp model. No company ever saved their way to prosperity.
    I totally agree with you on the subject of quotas. Cascaded quotas have an implied premise that the distribution of performance levels are the same in every practice, geography, and industry group. How absurd is that?! A practice full of stars will be penalized and a practice full of “C” players will be unduly rewarded. It is much better to award a fixed pool to a particular practice and let the manager decide if he has 70% “1’s” or 10%. As I mentioned in another recent post, the quota system is definitely meant to be a game of musical chairs to “incentivize” staff and “legitimize” layoffs.
    Mandatory overtime – there is a definite cost in retention, but no one ever factors that in when targets are set at the beginning of the year. Benefits – this one is the one area where I will give IBM a bit of a pass, since it is an economy-wide phenomenon. We may take it a little farther than the competition. On lip service, there is definitely an inverse relationship between the amount of propaganda that a company spews and the amount of genuine positive management action. Any company that has to tell you that you are important doesn’t really believe it.
  • "Excellent Question - Let's Do the Math" by "Dose of reality". Excerpts: Here's how I would stratify the staff that are at BCS at any given time.
    • Bedrock: 20% of total staff. Virtually no turnover. Either no external marketability at current salary levels, or no desire to make a change. Content to just coast along career-wise and compensation-wise. Toe the company line, do whatever it takes to keep their job, since the alternative is either unemployment, or having to actually grow and improve somewhere else.
    • Pretenders: 5% Level 10s and a few level 9s. Have talent, but have invested so much of their career capital in PwC or BCS that playing the part of practice leadership is too much to lose to risk going elsewhere.
    • Oblivions: 10% Susceptible to mind control and coercion of the Big Blue Piglet Machine. Continuously believe that things will get better next year and believe that IBM will reward them when they do. Are insanely proud of that "impressive" IBM tag on their resume, as are Mom, Dad, and Uncle Harold who built the very first vacuum tube 704 back in 1954. Very low turnover.
    • Nuvo Diched: 65% These are the fresh meat recruits that come in and don't fall into one of the first three categories. They eventually figure out that there is no future here and move on. Median tenure is a bit less than three years. This is my intended audience, both pre-acceptance and post-acceptance.
    Now if you have 35% turnover on 65% of the workforce, the blended turnover rate will be between 20 and 25%. While that doesn't sound all that bad, what does that tell you about the quality and effectiveness of the average staff member??! Ok now all of you lurkers. Which category do you fall into?....be honest. If you can look at your situation from an outside perspective, which category do you think you should be in?!
  • "Missed a group" by "ancientblueconsultant". Full excerpt: There's the older highly skilled tech types that are on the old pension plan and thus have golden handcuffs. As one colleague of mine put in a 25th anniversary congratulatory letter album, they stay until 25 then run the minefield from 25-30 years to get the retirement. By then, they are truly scared, tired and worn out. On the other hand, they are leaving in droves as soon as eligible to retire with a paltry 25-35% of base pay as retirement. I'd say they are 10-15% of the IGS population, mostly skewed to the 8-10 band level. Some are in the first group, but many could get a job instantly because of their reps and skills.
    BTW, who says IGS isn't already experiencing at least 20% turnover per annum? You are right. The bonus is a key decision maker for many this year. That's why they came up with the 2+!
  • "Excellent Question Again" by "Dose of reality". Excerpts: On a macro level, you have to realize that the mix of those in the revolving “65%” pool will decrease and deteriorate over time. GR has to realize that organizational dynamics, by definition, are never static. The longer the legacy of employee exploitation continues, the more accelerated the transition from hard charging loyalist to disillusioned deserter, and as a result, the smaller the revolving pool, and the less time they spend “lending extra effort” while they are here. The entire culture changes to one of “bedrocks”, with a slightly higher concentration of “oblivions”, since eventually that is all we will be able to recruit, along with the new class of “notalents” that will come since they have no place else to go, and BCS has no one else to hire. It’s a hideously perverse “field of dreams”. We will continue to whip the masses to make ever-higher and less achievable targets, performance – comp equilibrium will get more out of balance, and time will continue to erode the fiction of career opportunity here. [...]
    Since GR is somewhere between clueless and in denial about how resource management affects resource contribution, none of this matters to her. As long as we can continue to get people in the door, she won’t care. Whether we have a roster that is market-competitive at a grass roots level, or just the first 50,000 people that called in to a 1-800 number, it’s all the same to her. That is the undeniable conclusion that one comes to when evaluating the resource management actions of the past three years.
  • "What city to live in" by "kindaoldibm". Full excerpt: If you join IBM in BCS/IGS, you're joining the part of the company that us old-timers refer to as "the strap an airline seat on your ass" division. Pick a city where you can live within a short commute to a very major airline hub, i.e. Dallas, Atlanta, Chicago. Commuting out Monday morning and back Friday night is bad enough without dealing with connecting flights. IBM has had a long term relationship with American Airlines, and you're "strongly encouraged" to use the corporate travel selection, so, everything else being equal, pick a hub where AA has a strong presence.
  • "Information" by "Dose of reality". Excerpts: Is it hard to stand out as a top performer? At entry level, a top performer is 100+% chargeable, gets rave reviews from clients, volunteers for every possible practice building chore, kisses a$$, never says anything unfavorable about IBM, and is willing to take any project that is offered to you, regardless of career fit or location. Frankly, none of that is hard to to - it is virtually all within your control. The good news is that very few people put forth the effort required to meet those objectives - you can easily "stand out".
    The bad news is you will get rewarded the same as the schmuck next to you who sat home all day surfing the net, never saw a client, does only what is asked (if that), keeps his negative comments to a manageable few, and manages to cleverly avoid bad project situations. Which brings me to your next question. Bonuses have not been given the past three years, and there is little chance of them being given any time soon. "Smoke and mirrors" would imply that there is at least the appearance of a potential. The only ones who we now try to sell that to are new recruits. People on the inside have pretty much fully discounted bonus targets to zero. Do yourself a favor, spend some time reading this forum, and then your exceedingly difficult decision should get ridiculously easy!
  • "Regarding Performance Anxiety" by "Dose of reality". Excerpts: There is a semantic question raised by Matthew's post that needs to be clarified regarding the issue of staff performance. He asked if it was difficult to stand out as a "top performer". There are three potential tiers to on this question.
    1. To PRODUCE/ACHIEVE like a top performer. This is a threshold that is eminently within the staff member's control. The sky's the limit, and you are only bounded by your willingness to sacrifice more time and effort. Very few will take this to a realistic maximum, let alone theoretical maximum effort, so you pretty much control your own destiny.
    2. To be EVALUATED as a top performer. The connection between achievement in 1. above and an official "1" rating is loose, inscrutable, and based on political considerations that are totally beyond your control. In addition, the quota of "1's" is so small that even if you did supplement your real achievement with the political manipulations required to have a chance at getting a "1" the chances are still extremely slim you will make the cut.
    3. To be REWARDED like a top performer. No one below D band has been rewarded as a top performer in three years, so even if you position yourself in 1. and make the cut in 2., you get virtually nothing in return for your effort, and whatever you do get is incredibly out of proportion to the effort and sacrifice you had to put forth to get it. Of course, the reason is that D band managers get rewarded for all the unrequited effort put forth by those playing this performance game of "no-win musical chairs" in the trenches.
    Now tell me, why would anyone want to play this game?
  • "Historical Perspective" by "Dose of reality". Full excerpt: No one entering the consulting profession should entertain any hope of having a reasonable worklife balance. This industry developed with a model that included high-value work, meticulous and uncompromising attention to customer service, and on-site presence. That is what enabled firms to charge 400% markups for resources. At those rates, clients rightfully expect teams to be at their beck and call, and be a cut above internal resources. In return, consulting staff received premium compensation and great experience/credentials, with an eventual payoff of equity (partnership), or a fast track to a C-level job. Worklife balance was paid light lip service – a wink and a nod, at best. However, it was a nice equilibrium between effort and reward, and everybody was satisfied. What has happened in the last five years in BCS in particular, and to a lesser extent in the industry at large is that the favorable aspects of being a consultant have diminished greatly in value, and the unfavorables have been amplified.
    Diminished Favorables:
    • Elimination of premium compensation
    • Work has become more pedestrian
    • Employment market perception of consultant skills and hire value is lower
    • Equity kicker has been all but eliminated
    Amplified Unfavorables:
    • Utilization targets have been raised, increasing the workload and…
    • Making it increasingly likely that project travel requirements will be onerous (smaller bench to call on)
    • Offshore model, where consultants are expected to carry the load and make up for the inevitable experience gaps and analytical deficiencies.
    • Increasing over-commitment on delivery capability in order to close deals.
    Now firms like BCS are continuing to operate with the implicit assumptions of the old model, charging close to 400% markups, with all the attendant client expectations that have historically gone along with that, as well as the resulting demands on staff. Since the motivation to run through walls has been removed, and the walls have been made thicker, something has to give. The previous equilibrium has been destroyed.
    The gut response to this situation from a lot of you seems to be a clamor for better worklife balance. That is simply not going to happen, given the market expectations and economics in our business model. If you come here, expect to give much more than you get, both from an historical perspective, as well as compared to the current employment market at large. It’s the worst of both worlds – the lifestyle of a consultant, and the career opportunity and reward of a middle-of-the-pack functional technocrat. Deceiving you into thinking that this is not the case is the only thing that keeps us going. Ask anyone that came in the class of 2001 or 2002 if in retrospect they would have made the same decision.
    If you want worklife balance, find another line of work. If you want a traditional consulting career track with both the lifestyle and opportunity implications, go elsewhere. If you are desperate for a job, a hopeless Pollyanna, and a glutton for punishment, BCS is for you.
  • "Bingo!....dead on, again" by "deep_eye". Full excerpt: Let me be painfully candid here - I would have joyfully kept my side of the bargain and all the attendant ramifications - enduring the flights, long periods away from home, the client's incessant tantrums, the partner's nonsense, etc., etc. IF, IF BCS had kept their side of the bargain. But why kill yourself in this meatgrinder, make the personal sacrifices, put up with all of the other BS and at the end of the year get some mealy mouthed crapola about how it was "another bad year," and oh yeah, by the way no bonus and a raise that would make Scrooge blush? I don't get it, I really don't.

Coverage on Social Security "Reform"
  • New York Times: Bush Seen Favoring Social Security Cuts. Excerpts: A leaked White House memo on Social Security suggested on Thursday that President Bush may favor cutting benefits for future retirees as part of a plan to privatize the popular federal program. The memo, e-mailed to the administration's conservative allies by a senior Bush aide, warned that failure to alter the formula used to set benefit levels for new retirees would undermine economic growth. [...] But the memo suggested that reduced benefits would help pay for the estimated $1 trillion to $2 trillion cost of adding Bush's privatized accounts to Social Security. The president twice brushed aside questions about Social Security on Thursday after discussing the issue in a meeting with Republican congressional leaders.
    Bush, who has made changing Social Security a top priority, is expected to hit the road soon as part of an election-style campaign to convince the public that change is necessary. But some Republicans said the White House would be committing a grave error by opting for benefits cuts. "This is completely politically indefensible," said Peter Ferrara, a senior adviser at the Institute for Policy Innovation who favors private accounts but no change in benefits. "They're giving the Democrats too much of a club to beat them up with," he added. Democrats, labor unions and senior citizen advocates say Bush is exaggerating Social Security's woes to give Wall Street a government-subsidized windfall. "In public, the president says he will protect Social Security benefits. But in secret memos to right-wing supporters, his advisers are revealing a very different plan," said Senate Minority Leader Harry Reid of Nevada.
  • New York Times: Stopping the Bum's Rush, by Paul Krugman. Excerpts: The people who hustled America into a tax cut to eliminate an imaginary budget surplus and a war to eliminate imaginary weapons are now trying another bum's rush. If they succeed, we will do nothing about the real fiscal threat and will instead dismantle Social Security, a program that is in much better financial shape than the rest of the federal government. In the next few weeks, I'll explain why privatization will fatally undermine Social Security, and suggest steps to strengthen the program. I'll also talk about the much more urgent fiscal problems the administration hopes you won't notice while it scares you about Social Security. [...]
    There are only two things that could endanger Social Security's ability to pay benefits before the trust fund runs out. One would be a fiscal crisis that led the U.S. to default on all its debts. The other would be legislation specifically repudiating the general fund's debts to retirees. That is, we can't have a Social Security crisis without a general fiscal crisis - unless Congress declares that debts to foreign bondholders must be honored, but that promises to older Americans, who have spent most of their working lives paying extra payroll taxes to build up the trust fund, don't count. Politically, that seems far-fetched. A general fiscal crisis, on the other hand, is a real possibility - but not because of Social Security. In fact, the Bush administration's scaremongering over Social Security is in large part an effort to distract the public from the real fiscal danger.
    There are two serious threats to the federal government's solvency over the next couple of decades. One is the fact that the general fund has already plunged deeply into deficit, largely because of President Bush's unprecedented insistence on cutting taxes in the face of a war. The other is the rising cost of Medicare and Medicaid. As a budget concern, Social Security isn't remotely in the same league. The long-term cost of the Bush tax cuts is five times the budget office's estimate of Social Security's deficit over the next 75 years. The botched prescription drug bill passed in 2003 does more, all by itself, to increase the long-run budget deficit than the projected rise in Social Security expenses. That doesn't mean nothing should be done to improve Social Security's finances. But privatization is a fake solution to a fake crisis
  • New York Times: In Plan to Reduce Deficit, White House Turns to Old Projections. Excerpts: To show that President Bush can fulfill his campaign promise to cut the deficit in half by 2009, White House officials are preparing a budget that will assume a significant jump in revenues and omit the cost of major initiatives like overhauling Social Security. To make Mr. Bush's goal easier to reach, administration officials have decided to measure their progress against a $521 billion deficit they predicted last February rather than last year's actual shortfall of $413 billion. By starting with the outdated projection, Mr. Bush can say he has already reduced the shortfall by about $100 billion and claim victory if the deficit falls to just $260 billion. But White House budget planners are not stopping there. Administration officials are also invoking optimistic assumptions about rising tax revenue while excluding costs for the wars in Iraq and Afghanistan as well as trillions of dollars in costs that lie just outside Mr. Bush's five-year budget window. [...] "I've been watching this more than 30 years, and I have never seen anything quite this egregious," said Stanley Collender, a longtime author on budget issues and a senior vice president at Financial Dynamics, a communications firm in Washington. "They are cutting the deficit from a number they never believed in the beginning," Mr. Collender said, referring to the decision to measure progress against the unrealized $521 billion deficit projection. "What if they had forecast that the deficit would be $800 billion last year? Would they take credit for having cut it by half?" [...]
    By far the biggest of these is his plan to privatize Social Security in part and let people divert some of their payroll taxes to private accounts. Republican and Democratic analysts alike say the proposal would require the government to incur "transition costs" of $2 trillion or more over the next decade or two. That is because payroll tax revenue would immediately plunge, while benefits owed to retirees would decline only gradually. Administration officials say any such transition costs should be treated separately from the regular budget, because they would eventually be recouped as benefits decline sharply over the next 75 years.
  • Boston Globe: Plan for Social Security relies on an immediate, familiar Bush strategy, by Peter S. Canellos. Excerpt: The run-up to President Bush's plan to deal with Social Security is looking a lot like the run-up to his plan to deal with Saddam Hussein. The expected Social Security shortfall has been a perennial domestic concern in much the same way that Hussein's intransigence with arms inspectors was a perennial foreign-policy concern: From the White House to Congress to think tanks, policy makers worried about it, but presidents (including Bush) felt no immediate need to deal with it. Then Bush decided to focus on it, and suddenly a long-term concern became intense and immediate. Much as the Iraq war was preceded by speeches designed to show Hussein in the most threatening light, the Bush economic summit seemed designed to dominate a slow news week with the idea that failing to deal with Social Security now will hurt the national economy. "The time to start making sacrifices is now . . . so that the markets can have confidence that we're on a course that is going to avoid a train wreck," Bush said at the summit. Still, the link between the current economy and a Social Security deficit that will begin to strike benefits in decades is every bit as speculative and theoretical as the link between Hussein and the war on terrorism in late 2002. [...]
    Shifting Social Security tax reserves into the private markets has been a pet project of some conservative economists for a long while, just as neoconservatives had been extolling the benefits of deposing Hussein long before Sept. 11, 2001. But much as the "lessons of Sept. 11" became Bush's impetus for taking on Iraq, the projected Social Security shortfall is his impetus for pushing private retirement accounts. But all along, the position of most Democrats has been that allowing private investment of any portion of Social Security does not ease the shortfall -- it increases the shortfall by draining cash for current benefits from the system. And, in political terms, it offers the most appeal to workers with enough savings for a comfortable retirement without Social Security: They can invest the money without suffering too much if it is lost. But poorer workers could face a double whammy: Lower projected benefits, plus the chance they would lose more of the money they need to live on if their investments go south.
  • New York Times: The Social Security Fear Factor. Excerpts: If you've lent even one ear to the administration's recent comments on Social Security, you have no doubt heard President Bush and his aides asserting that a $10 trillion shortfall threatens the retirement system - and the economy itself. That $10 trillion hole is the basis of the president's claim last month that "the [Social Security] crisis is now." It's also the basis of the administration's claim that the cost of doing nothing to reform the system would be far greater than the cost of acting now. Well, the $10 trillion figure is the closest you can get to pulling a number out of the air. Make that the ether. Starting last year, as the groundwork was being set for the emerging debate, the Social Security trustees took the liberty of projecting the system's solvency over infinity, rather than sticking to the traditional 75-year time horizon. That world-without-end assumption generates the scary $10 trillion estimate, and with it, Mr. Bush's putative rationale for dismantling Social Security in favor of a system centered on private savings accounts. The American Academy of Actuaries, the profession's premier trade association, objected to the change. In a letter to the trustees, the actuaries wrote that infinite projections provide "little if any useful information about the program's long-range finances and indeed are likely to mislead any [nonexpert] into believing that the program is in far worse financial condition than is actually indicated." [...]
    Contrary to Mr. Bush's frequent assertion that Social Security is constantly imperiled by political meddling, it has in fact been preserved and improved by political intervention throughout its 70-year history, most significantly in 1983. The system could - and should - be strengthened again by a modest package of benefit cuts and tax increases phased in over decades. Instead, the administration wants workers to divert some of the payroll taxes that currently pay for Social Security into private investment accounts, in exchange for a much-reduced government benefit. To replace the taxes it would otherwise have collected - money it needs to pay benefits to current and near retirees - the government would borrow an estimated $2 trillion over the next 10 years or so and even more thereafter. In effect, the administration's plan would get rid of the financial burden of Social Security by getting rid of Social Security. The plan shifts the financial risk of growing old onto each individual and off of the government - where it is dispersed among a very large population, as with any sensible insurance policy. In a privatized system, you may do fine, but your fellow retirees may not, or vice versa. [...]
    The Congressional Budget Office analysis also likely understates the costs to individuals of privatizing Social Security. The borrowing that would be needed to establish private accounts could lead to higher interest rates, a weaker dollar and slower economic growth. It is also likely that future tax hikes would be required to cover the interest payments on the additional national debt. The only hands-down winner would be Wall Street, as fees to manage millions of accounts poured in. (Those fees, not incidentally, would come out of your return.) Current stockholders would also stand to benefit, as increased demand pushed up stock prices, giving existing owners a gain at the expense of newcomers who would be forced to buy high. The affluent, who could afford professional investing advice, would also be advantaged, even though everyone would be taking the same risks. [...]
    If Mr. Bush were not so serious about privatizing Social Security, his urgency would be silly. Compared with other challenges looming for the government, it's a non-problem. The shortfall in the Medicare hospital insurance fund is two to three times the size of the Social Security shortfall, and that fund is projected to be insolvent some two to three decades before Social Security. Taken together, the costs of the Medicare prescription benefit and of making the tax cuts permanent - Mr. Bush's two main domestic initiatives - are 5 to 8.5 times larger. And his hair is on fire over Social Security? One of the most distressing aspects of the debate over Social Security privatization is that it distracts from more pressing issues and obscures better solutions to the problem of secure retirement.
  • New York Newsday: Generations' support for each other in peril. Excerpts: The intergenerational nature of Social Security and Medicare is often overlooked in debates about their future. But in the creation of Social Security and, later, Medicare, the legislation recognized the principle that each generation of Americans shall support the programs their elders depend on for their health care and security (although Medicare is partly financed by its beneficiaries). One obvious reason is that the young, if they're lucky, will one day have access to those same programs supported by their children. And these programs relieve the young from paying out of pocket for their parents' care. But beyond those practical reasons, there is a moral imperative for the younger to care for the older through their government. It's the right and civilized thing to do. Just as we are one nation, in which Texas taxpayers support the New York subways and New Yorkers pay to maintain the Houston Ship Channel, so we are one continuing society, in which each generation depends on and cares about the other. Despite extensive publicity on aging issues, the alleged crisis in Social Security and Medicare costs, a November survey by AARP found that there was "little evidence of intergenerational conflict." And the young favor the continuance of both programs.
  • Washington Post: Social Security Formula Weighed. Bush Plan Likely to Cut Initial Benefits. Excerpts: The Bush administration has signaled that it will propose changing the formula that sets initial Social Security benefit levels, cutting promised benefits by nearly a third in the coming decades, according to several Republicans close to the White House. Under the proposal, the first-year benefits for retirees would be calculated using inflation rates rather than the rise in wages over a worker's lifetime. Because wages tend to rise considerably faster than inflation, the new formula would stunt the growth of benefits, slowly at first but more quickly by the middle of the century. The White House hopes that some, if not all, of those benefit cuts would be made up by gains in newly created personal investment accounts that would harness returns on stocks and bonds. [...]
    Opponents of the proposal have also been mobilizing. Under an inflation-linked formula, benefits would keep up with prices, but wage levels determine standards of living, Rother said. Social Security benefits currently equal 42 percent of the earnings of an average worker retiring at 65. Under the new formula, that benefit would fall to 20 percent of pre-retirement earnings. Future retirees would, in effect, be consigned to today's standard of living. "It's like saying elderly people today should live at a 1940 standard of living," said Robert Greenstein, executive director of the liberal Center for Budget and Policy Priorities. "Part of our social contract has been to allow seniors to participate in rising standards of living rather than consigning them to some second-class status in retirement."
  • New York Times: Choose and Lose, by Barry Schwartz. Excerpt: This brings me to the final defense of privatization: the payroll taxes you pay are your money, and you ought to be able to do what you like with your money. This, I suspect, is the real justification behind the move to privatize, and it is the worst reason of all. The payroll tax is not "your" money; it's our money. Social Security was created as an insurance scheme, not a pension scheme. It was meant to provide a safety net, to protect the unlucky from immiseration in old age. The benefits we get are not payouts from accounts in which we have accumulated our own private stash. What we get is largely determined by what we earned, but we keep getting it even after we've taken out every penny we put in. And if we happen to die early, someone else reaps the benefits of our contributions. The Bush administration should be honest with the American people and ask us if we want to do away with Social Security, without pretending that privatization will solve the problem of financing the trust fund without pain. I suspect that the American people would reject this effort to transform their "old-age insurance" into another opportunity to roll the dice in the investment casino.
  • New York Times: No Pain, No Savings, by Gene Sperling. Excerpts: If President Bush truly wants a bipartisan agreement on Social Security reform, he should recognize that he can keep the system solvent, increase savings and promote his ownership agenda without dividing Washington by carving Social Security into private accounts. The president can promote the individual ownership he wants and protect the guaranteed Social Security benefits Democrats insist on with a new universal 401(k) that offers all Americans a private retirement account in addition to Social Security, and uses government funds to match contributions made by moderate and lower-income workers. A universal 401(k) would increase savings far more than partly privatizing Social Security. Privatization that simply allocates part of the current 12.4 percent Social Security payroll tax for employees to invest in private accounts does nothing to increase national savings: it's like taking $1,000 a year from your parent's 401(k) and putting it in your own individual retirement account. Allowing people to invest some of their Social Security payroll taxes in the market simply adds risk to the one risk-free leg of the retirement stool. If instead people could invest in universal 401(k) accounts - in addition to Social Security - that provided new incentives to those families having the hardest time putting money away, America would actually leverage new savings, not just shift existing savings around. [...]
    To win Democratic support for a Social Security fix, President Bush must also commit to mutual sacrifice. The administration's tax cuts already save the richest 1 percent of Americans nearly $100 billion a year, an amount that over time would keep Social Security solvent for 75 years. Before President Bush can ask Democrats to go along with any tax or benefit changes that affect average Americans, he needs to ask this most fortunate group to help bear the burden of reform. The president should propose a 3 percent surcharge on all income over $200,000 - whether from earnings, dividends or capital gains - and use the money to increase national savings now and help keep Social Security solvent. He could make the deal contingent on a bipartisan agreement to find equivalent savings to shore up Social Security through measured revenue and benefit changes. This strategy would require real compromise. But if the president wants to strengthen savings, promote his "ownership society" and keep Social Security solvent, he could use these measures to light the way to the bipartisan agreement he needs.
  • Jim Hightower: Social Security Works. Full excerpt: Let me tell you a story of progressive progress. In 1939, two-thirds of America's senior citizens lived their "golden years" in cold, hard poverty. Just a decade later, that percentage was down to half. By 1959, it was only one-third. Today, the number is less than 10 percent. That's progress. What's progressive about it is that this decline in poverty is the result of the New Deal's passage of our nation's landmark Social Security program. Yes, the very same program now under attack by Wall Street wolves and congressional opportunists of both parties who insist that Social Security is doomed to failure and facing an imminent financial crisis.
    Horsedooties. First, this is a program that actually works, providing the modicum of income so our gray-haired citizens have a basic level of decent living when their earning years are over. Second, Social Security is a model of efficiency, requiring only a single percent in administrative costs. Compare that to the insurance corporations that suck out one-third of our healthcare dollars to pay for their corporate bureaucracies, executive salaries, marble palaces, and advertising. But, no, cry the Chicken Littlers, Social Security is going broke! Hogwash. Without changing anything, Social Security is financially sound for the next 40 years. Name me a corporation that can claim that!
    Yet, the Bushites – on behalf of Wall Street finaglers – seek to privatize this public treasure, pushing people to put their Social Security nest egg into the stock market. Hello – these are the same investment geniuses who only three year's ago would have advised you to invest in Enron – a stock that fell from $97 a share to 57 cents in only one year! Wall Street hustlers, members of Congress, and other "reformers" already have their own golden retirements covered. I say no one should be allowed to "reform" Social Security unless they actually need it.

Now on the Alliance@IBM Site:
  • Union Members Aid Tsunami Victims
  • UWUA Supports Soldiers, Families
  • "PBC’s and Behavior Modification" by a Boulder Alliance member. Excerpts: So none of that is new news to you, you’re saying. You’ve known all that for a long time, you’re dealing with it as best you can and you think you’ve got it pretty well under control. Well, if you think so, you may be in for an unpleasant surprise come PBC time – 2005. What was, at least in principle, a program based on performance objectives (however subjective), is about to have a whole new dimension added – personal behavior under the guise of something called “Foundational Competencies” (New PBC and Performance Bonus Programs – published Feb. 2004).

 

"The test of our progress is not whether we add more to the abundance of those who have too much; it is whether we provide enough for those who have too little." — Franklin D. Roosevelt
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