Unions Update: Ford's 20 Million Dollar Man is About to Slit the Automaker's Throat

On September 9 Wizard pointed out this gem from the LA Times:

"As Ford Motor Co.'s new chief executive, Alan Mulally is staring down a long road as he seeks to turn around the ailing auto giant. But two weeks into the job, he'll be able to bank the lion's share of the $20.5 million he will receive in the first year.

That amounts to $56,164.38 for each day of the year. "

Now we hear that Mulally plans to step up the pace of the inevitable layoffs, buyouts and plant closures. That sounds reasonable. When business is bad, cut your overhead costs until you're profitable again. Problem is, this strategy might have exactly the opposite effect.

In an interesting article in The New Yorker, Malcolm Gladwell describes the "dependency ratio" and how it can sink a company like GM or Ford while miraculously lifting Ireland's economic fortunes.

Simply put, the dependency ratio compares the number of active wage earners against pensioners. The more the balance shifts in favor of pensioners, the greater a company, or country, or family's liability becomes relative to its ability to fund that liability. Bethlehem Steel is a case in point:

"But Big Steel didn’t get bigger. It got smaller. Imports began to take a larger and larger share of the American steel market. The growing use of aluminum, concrete, and plastic cut deeply into the demand for steel. And the steelmaking process changed... As a result, steelmakers like Bethlehem were no longer hiring young workers to replace the people who retired. They were laying people off by the thousands. But every time they laid off another employee they turned a money-making steelworker into a money-losing retiree—and their dependency ratio got a little worse. According to Reutter, Bethlehem had a hundred and sixty-four thousand workers in 1957. By the mid-to-late-nineteen-eighties, it was down to thirty-five thousand workers, and employment at Sparrows Point had fallen to seventy-nine hundred. In 2001, Bethlehem, just shy of its hundredth birthday, declared bankruptcy. It had twelve thousand active employees and ninety thousand retirees and their spouses drawing benefits. It had reached what might be a record-setting dependency ratio of 7.5 pensioners for every worker.

This conundrum, and Gladwell's article, make a good case for nationalized health care and pension benefits - It's called spreading the risk, stupid. Too bad it's probably too late for Ford, not that it will affect Mulally's bonus.