The Confidence Game
To boost profits, companies are slashing benefits and backing out of costly pension commitments. But broken promises don't come cheap.
By Jeffrey Pfeffer

(Business 2.0) – THE HEADLINES TELL THE TALE: Companies are abandoning pension and health-care benefits for both active employees and retirees. IBM helped start the trend in the 1990s, when it tried to switch roughly 140,000 of its U.S. workers from a defined-benefit plan to a system that would have provided lower payouts to older, longer-serving workers. Since then, tough times have encouraged employers like AT&T and even my own Stanford University to try to revise their pension programs.

These aren't isolated examples. A recent survey by Deloitte Consulting found that 52 percent of 125 companies polled are considering or have already made major changes to their pension plans. A Mercer survey last year found that 80 percent of companies reduced health-care coverage for future retirees, while 40 percent make current retirees pay the full cost of health insurance. The explanation is simple: When senior execs face intense pressure to reduce costs and fix their balance sheets (and pension obligations are liabilities, after all), many see deferred compensation as a tempting place to make cuts.

My advice for workers? If employers offer you lower wages now in exchange for some form of deferred compensation later, give them that famous line from Jerry Maguire: "Show me the money." Perks like generous retirement, long vacations, and retiree health insurance might sound sweet, but if they aren't spelled out in a detailed contract, your bosses' promises today may be absolutely worthless tomorrow.

How is this legal? After all, when I buy a house, I can't unilaterally decide later to terminate my mortgage payments. That's because bank loans involve contracts detailing specific terms, payment schedules, obligations, and penalties. Employee benefits are different. Deferred compensation usually takes the form of general promises that simply assume employers will continue current practices. Bosses can't take away compensation you've already earned or accrued, but many employers explicitly reserve the right to change the terms of their benefit packages somewhere down the road—and it's perfectly legal for them to do so.

It's not just workers who take a hit when organizations abandon commitments. Companies also pay a price. Sooner or later, employees conclude that employer promises are not to be believed—a shift that makes them much less willing to accept offers of deferred compensation. Yet labor economists say deferred compensation is a good thing, because it binds employees to their employers' long-term interests. If "golden handcuffs" lose their staying power, turnover will rise and workers will become more disengaged, both of which exact a real toll on quality, productivity, and innovation.

Trust is a precious commodity. A survey by the Discovery Group found that 52 percent of employees already don't believe information they receive from senior management. A Towers Perrin survey reported that less than a third of employees were committed to their jobs, and 43 percent said they weren't content. These aren't touchy-feely problems; they have a tangible impact on a company's ability to adapt to changing markets. Look at the airline industry: Delta faces bankruptcy because its long-tenured pilots don't trust it to maintain its pension plans and are exercising an option to get paid now, thus exacerbating the airline's cash crunch. Meanwhile, bankrupt United has been struggling to develop a turnaround strategy with flight attendants and pilots who feel they've been repeatedly misled while their benefits have been steadily scaled back.

Your company may not be slashing benefits, but that doesn't mean you can feel smug as agreements between employers and employees are casually broken elsewhere. Distrust is contagious, and your ability to manage and compete is influenced by what other companies do. Ditto for potential regulatory and legal hassles—IBM's backtracking on pension benefits, for example, prompted congressional hearings and a class-action lawsuit recently settled for $300 million. Trust must be earned, and once lost, it's excruciatingly difficult to restore. If executives want their pronouncements to carry any weight, they might start by encouraging their peers to keep their promises.