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How Vulture Capitalists Killed the Twinkie

The demise of Hostess is a story of management that boosted its own salaries, while failing to make agreed payments into workers’ pension funds.

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As a result of management that still hadn’t really attempted to adapt itself to new market realities, the company earned profits in 2011 of $2.5 billion: That’s 11 percent less than in 2008, before Ripplewood took over. But thanks to debt approaching $1 billion, Hostess ended 2011 with a loss of $341 million. The CEO who led the company back into bankruptcy? He got a pay raise — while Hostess pushed a 30 percent salary and benefit cut onto its employees. (A previous failed chief executive, Brian J. Driscoll, was pushed out, but only after the board  tripled his pay package to $2.55 million.)

That leaves the unions in one corner and the hedge funds and Hostess management in the other. Management ordered the company to stop contributing to the union pension funds, ignoring their obligations under collective bargaining agreements. They have demanded a new round of concessions, which would have doubled insurance premiums, negated all pension obligations, and slashed pay by 27 to 32 percent. Again, the 14-year Hostess bakery veteran: “Remember how I said I made $48,000 in 2005 and $34,000 last year? I would make $25,000 in five years if I took their offer. It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me.”

Hostess CEO Greg Rayburn attempted to blame the company’s collapse on its workers and, in a move that seems calculated to add insult to injury, today asked a bankruptcy judge permission to pay executives $1.75 million in bonuses to oversee the dissolution of the company (and 18,000-plus union jobs). And that’s after a round of executive pay raises earlier this year.

The union, meanwhile, faced an increasingly untenable position. Pick your poison: another round of humiliating concessions resulting in poverty wages and almost no benefits, or go down swinging? The latter may not seem sensible to those judging from 30,000 feet, but clearly the bakery workers were sick and tired of giving in — 92 percent of them voted against accepting the cuts.

“This is the Twinkie cliff that the company drove over: They had fairly extensive (cuts) for a protracted period of time and a failure to adapt to the market,” says Harley Shaiken, labor professor at the University of California, Berkeley. “I think why the bakery union refused these steep concessions is because they didn’t see a credible plan to get the company out of this. They just saw that they were being asked to bear the brunt of the managerial mistakes. There were no good options, just disastrous and catastrophic options.”

Criticism of the Hostess workers seems to be manifested by a more subtle form of union bashing. It’s not that unions are greedy, it’s that they are outmoded, and the Hostess crisis is emblematic of organized labor’s precipitous decline. They are dying because workers don’t like them anymore (so this argument goes), precisely because of situations akin to what is unfolding at Hostess. As Diana Reese noted in the Washington Post, quoting the writer Donna Trussell, “Unions clung to an organizational model more suited to a 19th-century economy than the one we have now. That’s why they’ve lost so many members. When unions protect only their own, and leave over 90 percent of the workforce twisting in the wind, they will inspire more envy than support. Adapt or die.”

The labor economist for the Heritage Foundation makes a similar argument at the National Review: “A unionized firm takes longer to respond to changing market conditions … Over time they wither away. This is why union membership hit a record low in 2012.”

 
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