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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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dodo 12/4/2012 | 11:22:24 PM
re: Schacht Faces Retiree Wrath "Schacht, escorted by a handful of bodyguards, met the retirees in a hotel conference room closed to the press and the public"

Scott

If the presentation was closed to the press, how did you get all these details?

Inquiring minds want to know:-)
materialgirl 12/4/2012 | 11:22:22 PM
re: Schacht Faces Retiree Wrath You can fool some of the people all of the time, and all of the people some of the time, but you can't fool all of the people all of the time. These retirees are mad because they sense that they are entering a two class society: a bunch of rich managers who are not very competent, but are connected, and a bunch of workerbees that are headed for poverty. They worked 20 years for a bill of goods so that managers can get a house in Aspen.

The "middle class" is a dying idea. The US is headed for a Latin American social structure, with a corrupt, rich, elite using the underpaid masses. Face it.

"Rich" McGinn paid himself well, while mismanaging the company. Now retirees are paying the price. What island is "Rich" on these days? He clearly lied, but not a hair on his head has been touched. As to "competent" managers who need to be paid alot, with the current rate of unemployment out there, that arguement is a total joke. Its just a club, as seen by their lousy performance in the face of that high pay.
whyiswhy 12/4/2012 | 11:22:21 PM
re: Schacht Faces Retiree Wrath The "middle class" is a dying idea. The US is headed for a Latin American social structure, with a corrupt, rich, elite using the underpaid masses. Face it.

Yep. It's a direct effect of globalization. As long as there is access to cheaper labor, capital will ALWAYS choose cheaper. It's economics 101: supply and demand. Let's see, in my lifetime: Japan, then SEA, then mainland China. And we haven't even tapped Africa yet.

You are either be an entrepeneur or a laborer. If you are a laborer, you will live like the rest of your class in (fill in the blank) country or continent labor capital is flowing to at the moment. If you are an entrepreneur, you can live wherever you want, and expect to live far above the masses, on a global scale.

That's one side of what globalization means.

On the other hand, if you are living in Africa, it's a great thing, on a relative scale. That's another side.

The one thing for sure is: entrepeneurs win.

So, free trade or tarriffs? Where do you stand?

-Why
Quick 12/4/2012 | 11:22:21 PM
re: Schacht Faces Retiree Wrath > The "middle class" is a dying idea. The US is headed for a Latin American social structure, with a corrupt, rich, elite using the underpaid masses. Face it.

If so, serious business will leave the country. Only competent team wins these days
materialgirl 12/4/2012 | 11:22:20 PM
re: Schacht Faces Retiree Wrath Good question, Why. Tarriffs don't work long term. Work will flow to the lowest production area, helping the locals.

What I have issue with is how the income is distributed. We have a group of corporate robber barrons who are amassing great wealth and creating none. Rich McGinn is a great case in point, as are Ken Lay, Bernie Ebbers, the Tyco management, Adelphia management, ......

I have issues with the rules of the game, which are supposed to reward skill and are not. As long as a bunch of rich incompetents are running the show, we are headed for disaster.

It is great for India that we are exporting our intellectual property along with our jobs. It allows bad managers to report profits for a few more quarters. However, it mortages our collective future. A smarter strategy is to keep the intellectual property created locally close to our vest, while sharing part of the gains.
Scott Raynovich 12/4/2012 | 11:22:20 PM
re: Schacht Faces Retiree Wrath The press was allowed in the hotel, just not in the conference room. There were plenty of people willing to talk, and afterwards Schacht provided a Q&A session for the press.
rjmcmahon 12/4/2012 | 11:22:19 PM
re: Schacht Faces Retiree Wrath What I have issue with is how the income is distributed.

I see it differently. Income is only part of the equation. Another is how energy flows are motivated and directed and how resources are allocated and provisioned.

We have a group of corporate robber barrons who are amassing great wealth and creating none. Rich McGinn is a great case in point, as are Ken Lay, Bernie Ebbers, the Tyco management, Adelphia management, ......

Agreed, though unfortunately, this may be little more than villification in our attempts to find better role models.

I have issues with the rules of the game, which are supposed to reward skill and are not. As long as a bunch of rich incompetents are running the show, we are headed for disaster.

I see it as "might makes right" because "might makes the rules." I also don't see might as a few rich guys taking power but rather misguided collectives worshiping the wrong things. Some examples. When a bunch of ghetto kids are taught to believe the NBA is the ticket to a better life. Or when a bunch of home owners are fooled into believing a shelter is worth a lifetime's worth of labor. Or when a senior believes an overpriced illiquid asset can be used to generate needed cash flows (while neglecting the community which defines those values.)

It is great for India that we are exporting our intellectual property along with our jobs. It allows bad managers to report profits for a few more quarters. However, it mortages our collective future. A smarter strategy is to keep the intellectual property created locally close to our vest, while sharing part of the gains.

It seems like a good strategy is to build environments of participation and contribution which minimizes the victim belief systems. Enabling the production of intellectual property can help all make progress towards those ends.
whyiswhy 12/4/2012 | 11:22:19 PM
re: Schacht Faces Retiree Wrath RJM;

When a bunch of ghetto kids are taught to believe the NBA is the ticket to a better life. Or when a bunch of home owners are fooled into believing a shelter is worth a lifetime's worth of labor. Or when a senior believes an overpriced illiquid asset can be used to generate needed cash flows (while neglecting the community which defines those values.)

As usual, you have it backwards and in denial-order.

The NBA IS one of the few tickets to a better life, and the drug and sex industry are the others, if you grow up in a ghetto.

They share one element in common: demand exceeds supply. And that rule is not taught enough, clearly. Even those that understand it, deny it. Like yourself, but I digress.

I see it as "might makes right" because "might makes the rules."

We've discussed this before, and it does not work in a Democracy, at least not for long, if it is exposed to light. Two issues:

1) We live in a representative Democracy, and if the representatives are corrupt, the system is corrupt at the get-go.
2) It's amazing how many dark corners excess greed can find to breed: the slightest loophole will be exploited.
3) I have nothing against greed. Its the excess that gets us in trouble. Like most other things in life.

The one thing the internet can help bring to this mess besides spam and ripped-off musicians is more people power. It's the power of communication.
fhe 12/4/2012 | 11:22:16 PM
re: Schacht Faces Retiree Wrath "Rich (McGinn) made a series of decisions that we thought were in the best interest of the company at the time," said Schacht. "They didnGÇÖt work. The fact that they didnGÇÖt work werenGÇÖt unique to Rich. There was a lot of that in the industry."

So what was Henry Schacht trying to say??? A large group of people making bad decisions doesn't mean it is ok to be part of it.

"... weren't unique to Rich..." only means there are many more inept CEOs screwing their companies, while lining their own pockets.
rjmcmahon 12/4/2012 | 11:22:16 PM
re: Schacht Faces Retiree Wrath The NBA IS one of the few tickets to a better life

Do you remember the old Sports Illustrated public service advertisement that went something like:

o Odds of a person becoming a NBA star - 1 in 10,000,000
o Odds of a person becoming a doctor - 1 in 100,000
o Odds of a person becoming an engineer - 1 in 50,000
o Odds of a person being illiterate - 1 in 10

Some good things to take from the NBA model:

o It is more fun to play in the game than it is to watch others play
o Teamwork is required if the sum is to be bigger than the parts
o Honoring the competitors is necessary before wins will occur
o Shooting 50% is pretty damn good
o Coaches lead by coaching
o Keep hope alive and don't stop playing until the final buzzer goes off

It's also worth remembering that real life isn't a game, it's what happens off the court.

It's the power of communication.

Agreed. Imagine when mankind stops fighting each other and starts solving our problems together. I know its improbable in our lifetimes, and fiber may never happen either, but the final buzzer has not gone off for us, or has it?
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