Archive for November, 2008

Recession : Interesting Analysis

Efinancialcareers has done some number crunching this morning and calculated the number of job cuts major investment banks would have to make in order to maintain compensation ratios (compensation costs as a percentage of revenues) in line with 2007’s.

In Efinancialcareers’ own words, the results “range from the farcical (Merrill Lynch) to the disturbing (Credit Suisse), and the reassuring (Goldman and Morgan Stanley)” — the last two, perhaps, not much of a surprise. Based on average pay for the year so far:

Merrill Lynch
Revenues Q1-Q3: 2008 – $834m; 2007 – $19,442m
Compensation costs Q1-Q3: 2008 – $11,170m; 2007 – $11,564m
Compensation ratio Q1-Q3: 2008 – 1,339%; 2007 – 59%
Headcount Q1-Q3: 2008 – 60,900; 2007 – 64,200
Average comp per head: 2008 – $183k
Layoffs over the past year: 3,300
Layoffs required to maintain compensation ratio: 58,195

Credit Suisse (investment bank only)
Revenues Q1-Q3: 2008 – CHF2,736m; 2007 – CHF16,217m
Compensation costs Q1-Q3: 2008 – CHF5,682m; 2007 – CHF8,111m
Compensation ratio Q1-Q3: 2008 – 207%; 2007 – 50%
Headcount Q1-Q3: 2008 – 21,300; 2007 – 20,399
Average comp per head: CHF266k (US$228k)
Layoffs over the past year: None; 1,000 staff added*
Layoffs required to maintain compensation ratio: 16,161

Deutsche Bank
Revenues Q1-Q3: 2008 – €6,102m; 2007 – €14,620m
Compensation costs Q1-Q3: 2008 – €3,250m; 2007 – €5,217m
Compensation ratio Q1-Q3: 2008 – 53%, 2007 – 36%
Headcount Q1-Q3: 2008 – 15,574; 2007 – 17,215
Average comp per head: 2008 – €209k
Layoffs over the past year: 1,668
Layoffs required to maintain compensation ratio: 5,130

UBS
Revenues Q1-Q3: 2008 – minus CHF21,418m; 2007 – CHF11,065m
Compensation costs Q1-Q3: 2008 – CHF4,589m; 2007 – CHF8,326m
Compensation ratio Q1-Q3: 2008 – unquantifiable; 2007 – 75.2%
Headcount Q1-Q3: 2008 – 18,901; 2007 – 22,666
Average comp per head: 2008 – CHF243k (US$208k)
Layoffs over the past year: 3,765**
Layoffs required to maintain compensation ratio: Everyone

JPMorgan (investment bank only)
Revenues Q1-Q3: 2008 – $12,516m; 2007 – $14,998m
Compensation costs Q1-Q3: 2008 – $6,535m; 2007 – $6,404m
Compensation ratio Q1-Q3: 2008 – 52%; 2007 – 43%
Headcount Q1-Q3: 2008 – 30,989; 2007 – 25,961
Average comp per head: 2008 – $211k
Layoffs over the past year: None; 5,298 staff added
Layoffs required to maintain compensation ratio: 5,647

Morgan Stanley
Revenues Q1-Q3: 2008 – $22,881m; 2007 – $28,476m
Compensation costs Q1-Q3: 2008 – $10,726m; 2007 – $13,365m
Compensation ratio Q1-Q3: 2008 – 46.9%; 2007 – 46.9%
Headcount Q1-Q3: 2008 – 46,383; 2007 – 47,713
Average comp per head: $231k
Layoffs over the past year: 1,330
Layoffs required to maintain compensation ratio: No additional layoffs required

Goldman Sachs
Revenues Q1-Q3: 2008 – $23,800m; 2007 – $35,246m
Compensation costs Q1-Q3: 2008 – $11,424m; 2007 – $16,918m
Compensation ratio Q1-Q3: 2008 – 48%; 2007 – 48%
Headcount Q1-Q3: 2008 – 32,569; 2007 – 29,905
Average comp per head: 2008 – $351k
Layoffs over the past year: None; 2,664 staff added***
Layoffs required to maintain compensation ratio: No additional layoffs required

* Between Q1 and Q308 vs. Q1 and Q307, excluding 500 layoffs announced in October
** Between Q1 and Q308 vs. Q1 and Q307; excluding 1,901 layoffs announced in October
*** Between Q1 and Q308 vs. Q1 and Q307, excluding 3,200 layoffs announced in October

It’s easy to poke holes in this, for instance, why use ratios from 2007 — the peak of the IB cycle, etc., but as an illustration in a worst-case scenario for banks, it’s quite interesting. Or terrifying, depending on your position.

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Caught between Ice and Fire

The Bangalore Police has said that in the first 7 months of this year, 1444 people in the city have committed suicide. Of these more than 655 people belong to the IT and ITES sector.

I am no conspiracy theorist but I felt some merit in analyzing what is happening around the world and its impact on team performance, team morale, employee well-being, talent retention and maybe suicides in the Silicon Valley of India. The way in which an organisation handles such change will dictate the impact of this economic downturn. Now, more so than ever, it is critical that the tough decisions made by an organisation are seen as fair.

These are extraordinary times, not just for India but the whole world. At no time in world history has inflation and economic downturn combined to produce what the IMF Managing Director, Dominique Strauss Khan, recently described as being “caught between ice and fire”. The world economy in the last 6 months has behaved between two risks – too cold and too big a slowdown in growth; too hot and the risk of inflation.

Confidence in the money markets is at its lowest for nearly twenty years. It is also feasible to say that the confidence felt by employees in riding out the storm is also severely shaken. Employees too are literally “caught between ice and fire”. “Ice” and “Fire” depicts – death, the end and destruction according to Indian mythology.

Over the coming months, several organisations are going to find themselves either with too many employees because of the need to downsize to ensure survival and/or a take-over or merger. Either way, tough decisions will be made over who is to stay and who, unfortunately, is to go. And the process by which these decisions are made can have significant impact on a company’s continued survival.

Now, more than ever in recent memory, it is also critical that organizations are seen as fair, transparent and objective in their people decisions. Bungling like what happened after “meeting of minds” between Kingfisher and Jet and overnight retrenchment of 700 probationers should not happen.

For long (late 1980s onwards), psychologists were playing around with the idea of equity and justice. More specifically, they made a distinction between distributive justice and procedural justice. Distributive justice concerns whether people believe they have received (or will receive) fair rewards. Procedural justice concerns whether people believe the procedures for allocating rewards are fair.

For example, if a person perceives their pay to be less than other individuals in similar positions in other organizations, then they are likely to perceive distributive injustice. However, if they believe that their own employer is allocating the organization’s limited funds fairly within the organization, then they will likely perceive procedural justice. In real terms, the employee is likely to be dissatisfied with their pay, but highly committed to their organization. That is to say, fairness is of critical importance.

Now let’s consider this information in light of the current economic situation. In terms of distributive justice, a drop in salary may leave many dissatisfied. However, the process by which this decision is made (i.e. procedural justice) can go a long way in mitigating these feelings of dissatisfaction and enhancing feelings of commitment. In turn, employees tend to demonstrate more of what are known as organisational citizenship behaviours (such as helping others, going beyond the call of duty, participation and engagement) and less counterproductive behaviours (such as unauthorized absenteeism, workplace theft, bullying and suicides).

So, where does this leave us?

Employee’s perceptions of fairness at the current time will be particularly important. As company’s look to reduce headcount, the process by which decisions are made over an individual’s future with the business will have a significant impact on the subsequent performance of such individuals.

It is critical that organizations employ objective, valid, fair, inclusive and most importantly transparent selection procedures when looking at who will stay and who will go. Whether the approach is based on appraisal data, assessment centres, competency-based interviewing or the like, organisations are morally obliged to ensure the process is:

• Based on clear, observable and justifiable criteria critical to the role in question
• Built on a foundation of accurate, objective and behaviourally – anchored evidence collection
• Realistic, robust and acceptable to participants
• Inclusive, transparent and avoids any adverse impact to different groups
• And finally, cost effective.

In the current climate, fear of the unknown will be rife. People will be looking for security and a feeling that all is fundamentally fair in the world. Employees on their part should be willing to tighten their purses and take salary cuts. Organisations going through major change, on their part, will play a big part in driving this fairness. If you treat those around you with justice and equity, you ensure a committed and motivated workforce to help weather the current financial storm and sail on into calmer waters and may be reduce the suicide rates.

Economic Downturn – Action & Reaction

Action: Three of the “Big Fives” of Wall Street – Bear Stearns, Merrill Lynch and Leman Brothers have disappeared. The two largest home mortgage institutions of US – Feddie Mac and Fannie Mae were rescued from bankruptcy because the government has effectively taken them over, just as it has effectively taken 80% of AIG. CITI Group is surviving by purely because of cash infusion by sovereign wealth funds.

When you look at this list, it really drives home the seriousness of the current US economic climate. The most arrogant symbol of American capitalism – the Wall Street had been barely saved from destruction by the most ‘capitalist’ nation on earth suddenly behaving like the most ‘socialist’. Let’s face it George Bush has just ‘nationalised’ the largest American insurance company AIG just as Indira Gandhi has done in her heydays.

Reaction: Our Harvard educated Finance Minster P Chidambaram rushes to in to say that India is insulated from the crisis looming large in the US. Rightfully so, because he is trying to prevent panic in the Indian Investors mind. But it just reminds one of the Oxford educated Dr. Manmohan Singh’s pat on his own back for the soaring Sensex during Harshad Mehta’s heyday. Dr. Singh attributed the then skyrocketing index to his economic reforms taking effect.

So notwithstanding the “sermon on the mount” by the ‘New Delhi Dream Team’, the impact will surely be seen in Indian market and we are bound to see some turbulence. It is too bad that our learned FMs are repeatedly caught on the wrong foot. But now the only thing the economists worldwide and in India (at least privately) are debating is the degree of impact.