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The Making It! Business Blog

from Executive Producer, Nelson Davis

"The world would be a better place if it operated on sound business principles"

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A Cone of Silence

Friday, Oct 31, 2008

At the top of this page is a line expressing a piece of my central philosophy regarding sound business principles being applied to create a better life. In the Los Angeles Times this week I read that between General Motors, Ford and Chrysler, the legacy big three American auto makers have 856,900 retirees on their payrolls. In other words they are sending checks to that many people who no longer help them develop, manufacture or sell their products. Even if each of those people is getting just $10 dollars per day, the total payout is staggering. In 2007 the automakers combined revenues were approximately $402 billion, but it seems that the retiree costs are helping them burn through cash reserves. It doesn’t require deep analysis to understand why they are teetering on the edge of extinction.

Since the ongoing financial turmoil has dragged uncomfortable subjects into the list of our daily discussions, let me add a new level of discomfort, pension payments and how vulnerable they really are. In the world of contemporary small business, many of us offer forms of retirement plans that combine contributions from the business owner with funds from the employees. But when the employment stops, so do the employer contributions. That is a pretty simple and sound business principle. Leaving your business open to unknown financial obligations that occur twenty years in the future doesn’t meet the criteria for rational or sound thinking.

In one of Winston Churchill’s most famous speeches he referred to an “Iron Curtain” descending over Eastern Europe after WWII. Well I’m borrowing a phrase from Maxwell Smart the bumbling hero of the “Get Smart” TV series where a favorite secrecy preservation device was the “cone of silence.” That is what seems to be surrounding this sensitive subject. Nobody at senior levels of politics or business wants to talk about what the staggering pension obligations really mean to an already muddled economic picture. Just as with the subprime mess, they know it is hard to get votes or make friends on Wall Street by lifting the lid of an uncomfortable truth.  If you dig into where the money goes in the budgets of cities, states and some industrial giants, you’ll be surprised how much is being devoted to pensions and health insurance payments. If the crunch we are in gets tighter, we won’t be able to turn away from talking about it.

The seeds for this potential calamity were sewn in the middle of the 20th Century. Since we are in the heat of presidential politics, let’s have a quick look at what pension arrangements apply to our Commander in Chief and leader of the free world.  It may surprise you to know that meaningful levels of pension payments are relatively recent. The Former Presidents Act of 1958 established the first permanent retirement payment system for ex-Chief Executives of the U.S. Although Harry Truman left the White House in 1953 with only his Army pension as income, the 1958 law did apply retroactively to him and any other former President alive at that time that was not removed from office by impeachment.  So, Truman and Herbert Hoover were the first two recipients of the pension, which was $25,000 per year. Later the pension was linked to the salary level of Cabinet officers, which has risen past $160,000 per year.

 

Remember that Microsoft, the Walt Disney Company, McDonald’s, and other iconic names in corporate America were once just small businesses with their owners hustling hard to make payroll. As they grew, various supplements and perks were offered to employees, but it didn’t usually involve paying them for years of not working. Ford Motor along with the other U.S. automakers yielded to United Auto Workers demands at mid-century for elaborate pension programs. Those businesses like Apple, Microsoft, Yahoo and others who came along later began to use company stock offerings to “bless” employees who gave years of service. With stocks currently doing a Swan Dive, which too is a troublesome subject for retirees and ex employees. We are now getting a picture of what choosing between a rock and a hard place feels like.

State governments are also walking on desperation row. This week New York Governor David Paterson asked Wednesday that Congress immediately provide state governments with a rescue package similar to the one it approved for the banking industry. The Governor says that his state is facing a deficit estimated at $47 billion over the next three and half years. California is in a similar situation though Schwarzenegger hasn’t yet pulled out the tin cup and begun begging the feds. When the country’s two most populous states have the biggest deficits, it can only mean that they are giving too much of something away. Here is my interpretation of the New York request. The Governor’s code-speak is saying “you guys can print money but we can’t so run the presses for us like you are doing for the banking system.”

The owner of a business grossing several million dollars per year said to me recently that “this economic downdraft and the government response let me know that we all have to be prepared to look after ourselves.” Fifty years ago, business owners at all levels had a handle on hope in our country.  Ray Kroc had hocked his house to build a milk shake mixer business which led him to the McDonald brothers in San Bernardino California. He opened the first Des Plaines Illinois franchise McDonald’s restaurant in 1955. The first day’s revenues--$366.12!  Fifty three years later, McDonald’s still prospers partly because it is really a string of small businesses owned by people who think like practical business operators. 

That Plexiglas “cone of silence” is about to be shattered. We’ll learn more about what is smart, the true cost of many things and what we can actually afford.

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