Schacht Faces Retiree Wrath

No fisticuffs, as ex-CEO Henry Schacht defends Lucent's retiree benefit cuts, saying it's an industry problem

October 1, 2003

5 Min Read
Schacht Faces Retiree Wrath

Lucent Technologies Inc. (NYSE: LU) former chairman Henry Schacht set off on his 2003 “Calm the Retirees” Tour yesterday, playing dates in North Carolina and New Jersey.

Schacht is charged with calming nerves and soothing anger about Lucent’s cutbacks in the retiree healthcare plans (see Lucent Retirees Get the Schacht). Meeting yesterday evening in Somerset, N.J., Schacht confronted 730 retirees with a blunt and clear message: Lucent ain’t got the money to pay for it.

Schacht, escorted by a handful of bodyguards, met the retirees in a hotel conference room closed to the press and the public. The meeting was attended by a local police officer, but no violence ensued. The closest it came was one angry Lucent retiree muttering, “Rich McGinn should be shot.” (McGinn is Lucent's former CEO.) And contrary to rumor, Lucent was not charging $100 admission. All retirees who showed up with photo ID were allowed into the meeting.

Schacht defended the roughly $85 million in cuts that Lucent is making in the healthcare benefits paid to retired Lucent workers, most of whom never actually worked for Lucent, but instead were inherited from AT&T Corp. (NYSE: T) after the breakup (see Lucent Cuts Retiree Healthcare). Schacht said Lucent doesn’t have the money to pay, and that Lucent remains in the minority of companies that pay any healthcare benefits for retirees. He also argued that Lucent is at a competitive disadvantage because many of its competitors, such as Cisco Systems Inc. (Nasdaq: CSCO) and Nokia Corp. (NYSE: NOK), do not have retiree healthcare costs.

”These costs account for 10 percent of our revenues,” said Schacht, in an interview after his presentation. “A company of this size cannot generate the cash to keep these subsidies in place. You can’t provide cash that’s not available.” According to Schacht’s presentation, the retiree healthcare program costs some $850 million per year. Lucent expects about $8 billion to $9 billion in revenue in 2003, and it isn't expected to break even this year (see Lucent Punts 2003 Profit Pledge). The healthcare costs do not include the retiree pensions, which are paid out of a different fund and are protected by the federal Pension Benefit Guaranty Corp. and cannot be touched by law.

Lucent has announced that, starting in 2004, it will no longer pay healthcare subsidies to dependents of former workers who retired on or after March 1, 1990, and whose base salary at retirement was $87,000 or more. Lucent's also jettisoning dental coverage and Medicare Part B expenses (any doctor visits and outpatient medical care not associated with in-patient stays) for all management retirees and their dependents.

The crowd reaction to Schacht's presentation veered from anger to understanding.

”They stole everything, and now they’re taking the rest from my healthcare,” said Harry Worth, a former AT&T worker who retired in 1985. “The only difference between them and Jesse James is that Jesse James had a gun.” [Ed. note: And a horse, Harry. Jesse had a horse.]

Others appeared to be sold on Schacht’s presentation, realizing the company no longer had the resources to pay full healthcare benefits.

”It’s a very complex situation,” said Harry Moore, a former AT&T employee now retired under the Lucent program. [Ed. note: Are they all named Harry?] “If they keep it 100 percent funded they would need to pay it out of cash. They’re trying to make money."

”There’s really isn’t much left when you go from $38 billion to $8 billion in revenues,” said Robert "Harry" Strohm, a former Lucent and AT&T employee who was with the company for 35 years. “Paying for healthcare is a big national disaster."

Executive compensation remained a hot-button issue. Retirees were asking why executive compensation remains at high levels while retiree healthcare budgets are being cut. The level of the cuts ($85 million) is roughly equal to Lucent’s budget for rewarding its top executives.

Schacht, who ceded his CEO post to Patricia Russo back in January 2002, then gave up the board chairmanship to her a year later (see Russo Rules at Lucent), said that Lucent needed to continue to pay high executive salaries to remain competitive. He also said that most published accounts of salaries included stock options that are currently worthless.

For example, he said that CEO Russo’s salary, which could well total more than $30 million in 2003 if stock options kick in, is mostly in options with a strike price of $7 (Lucent shares currently trade at about $2). In 2002, Russo received a $1.2 million base salary and a $1.8 million guaranteed bonus to lure her from Eastman Kodak. Other top executives received bonuses totaling nearly $14 million, despite the fact that the company lost billions of dollars (see Lucent Fat Cats Gorge in 2002.

Much of Schacht's pitch consisted of a “the industry is in turmoil” story and painted Lucent as a victim of the telecom downturn. In the post-presentation interview, he alluded to mistakes by former CEO Richard McGinn but didn’t take any direct responsibility for Lucent’s problems himself.

"Rich (McGinn) made a series of decisions that we thought were in the best interest of the company at the time," said Schacht. "They didn’t work. The fact that they didn’t work weren’t unique to Rich. There was a lot of that in the industry.”

Despite Schacht’s case, the bulk of the retirees appeared to leave the meeting unhappy, regardless of the cause.

”Everybody’s pretty upset… The company can’t afford it,” said retiree Tony De Marchi. “Supposedly they will save $75 million. They explained away executive salaries as worthless stock options. But even if they keep 15 percent of their pay, it’s a lot more than I’m getting.”

— R. Scott Raynovich, US Editor, Light Reading

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