IBM Sets Plan Of Incentives To Trim Staff

Offer for Early Retirement Is Seen Saving Annually More Than $100 Million

By Dennis Kneale, Staff Reporter
The Wall Street Journal

September 15, 1986

International Business Machines Corp. announced an early-retirement program aimed at cutting several thousand people from its U.S. work force in anticipation of sluggish computer demand next year.

But the incentive program -- the broadest and most aggressive ever offered by IBM -- won't affect the company's struggle to avoid an earnings decline this year. Some analysts also say the move still won't adequately trim IBM's huge payroll and high costs as the industry slump and IBM's own problems linger.

The new plan, disclosed Friday to IBM's more than 242,000 U.S. employees, will double the number of its workers eligible for retirement and may save the company well in excess of $100 million a year, according to analysts' estimates. The plan amounts to tacit recognition by Armonk, N.Y.-based IBM of what some Wall Street critics have contended: that the world's largest computer company has too many people producing too many products in a time of lackluster demand.

"We still don't see a turnaround in U.S. capital spending," an IBM spokeswoman said. "We're announcing the incentive to help bring our U.S. employee population in line with projected needs."

Even without the program, IBM will cut its expenses by more than $500 million this year, more than half of it from reductions in discretionary spending such as travel and consulting services. That follows a comparable cut in such expenses last year.

IBM's U.S. work force also is slated to shrink by 4,000 people this year because of a hiring freeze and other previously announced steps. The company said that including the effects of the early-retirement program, it should decline by an additional 8,000 or more next year. That indicates the company expects about 4,000 workers to accept the retirement offer.

Washington-based analyst Ulric Weil, however, said that a cut of 4,000 jobs at IBM "isn't enough to keep expenses in line with the kind of revenue growth likely to be seen over the next several years" in the industry and at IBM.

"If this is the beginning of a serious effort to slim down IBM's people-related expenses, that's terrific," he said. If not, the new program is "a Band-Aid."

IBM officials acknowledge that industry sales, which typically had grown at 15% or more annually on a world-wide basis but have been sluggish since 1985, are likely to grow at a lower rate in the U.S. in the long term. IBM is scrambling to avoid a second consecutive year of falling earnings, which would be its first two-year earnings decline since the Great Depression. In the first half of this year, its net income was down 3% from a year earlier to $2.32 billion, or $3.77 a share.

But IBM's efforts are hampered by its tradition of not laying off workers. It emphasized Friday that its early-retirement program is strictly voluntary. John F. Akers, chairman and chief executive officer, said in a written message to U.S. employees that the plan will help make IBM "leaner, stronger" and still "help us preserve the tradition of full employment."

In New York Stock Exchange composite trading Friday, IBM's common closed at $137.375 a share, down $1.875. It was the Big Board's most actively traded issue of the day, with 4.4 million shares trading hands.

IBM said most of the plan's costs will be accounted for in the current quarter and that any financial impact this year will be "minimal." Enrollment in the plan is open until Dec. 15, but employees won't be required to retire until next June 30. IBM wouldn't specify the expected costs or savings, but it said the positive impact will exceed any costs in 1987 and thereafter.

Analyst Daniel Mandresh of Merrill Lynch & Co. estimates that an earlier, less sweeping incentive program cost IBM $250 million for about 2,000 retiring workers in 1983. He estimates that IBM can cut 9,000 people next year and boost earnings between 45 cents and 60 cents a share, but he still isn't changing his 1987 earnings estimate of $11.50 a share. Other analysts foresee a boost of 20 cents to 60 cents a share from the program in the next year or two.

The majority of the program's cost stems from additions to IBM's post-retirement medical-benefits fund. IBM said most of that expense will be covered by the fund's value in excess of its obligations.

IBM previously has offered inducements such as cash payments to trim its work force. But it hasn't done so on a nationwide basis since 1975, and this plan goes beyond earlier efforts, increasing both the number of newly eligible employees and the benefits of retiring now.

The plan adds five years of service and five years of age to IBM's basic formula for figuring retirement benefits. In an example provided by IBM, the plan would increase the pension of a 55-year-old worker who earns $40,000 annually and has been with IBM for 30 years by about 30%, to $16,361 a year from $12,621 without the incentive program.