Random Thoughts on The City, Wall St & Capitalism

It's December, people are singing carols at train stations and shopping malls, letters to Santa are being written. Yes it's that time of year again - financial year end and bonus time, either this month or in the following months. A time of much heartache, emotional distress and intrigue. That's just the senior management side of things, imagine how the worker bees feel. The process in most firms is a mystery.Who gets what when and HOW much. Are they worth it? what I did I do wrong ? etc.The speculation of winners and losers in winning at the loser's game provides good fun well into the new year for all involved. The bonus, VICP, performance-related compensation, whatever you want to call it, is in most cases a purely discretionary gesture. There is no entitlement or obligation to pay anything. Why do so many people forget that?.

Here are some basic rules for a general theory of bonus pool allocation for senior managers :

• If you can possibly get away with it, under no circumstances pay anything out at all. There are only two situations where you will need to pay a bonus. Firstly if the employee can point to a direct contribution to P&L. Yes that's how much I made, that' s my cut. Secondly in the case of contractually guaranteed bonuses. ONLY if it's in writing. Oral contract, not worth the paper it's not written on. This approach should ensure there is much more left for the management pool. Remember it always looks good to hand some back.

• Never reward top peformers adequately. This will only set a precedent for the following year, where the bar will be set higher, it has the additional dis-incentive of making them take their foot off the accelerator for the rest of the year. Remember the old adage from the organisational motivation courses. Money does not motivate in the long term.So why bother. If we are agreed that 99.99% of all jobs can be done adequately 99.99% of the time by 99.9% of any random selection of people, then it follows managed turnover is a good thing. The next set of hires should be cheaper and younger, therefore more gullible and energetic than the chumps in the current jobs.So save by not giving good bonuses and then save again by hiring cheaper replacements.It's a virtuous circle.

• Always give the best part of the bonus pool to your friends, and or good looking employees. We all want to see our friends happy rather than complete strangers it's only human nature. Good looking people of both genders are a joy to have round and are generally less bothersome than the ugly harder workers. Ugly employess have to work harder because they are not good looking, ergo whether they receive a bonus or not they will continue to work hard. If they don't they should be managed out for poor performance. They can be replaced by cheaper and younger ugly people of which there is an excess supply. That's the nature of the labour market. In case any mangers feel uncomfortable doing this ,bear in mind there is no country in the world with legislation that regulates this area.That is to say it's not illegal to employ people on the basis of their attractiveness. The recent case of phamaceutical sales reps being recruited from college cheerleaders should give you some comfort.( see the article at the end of this blog- below)

• Always reward the bottom 20% of performers by at least 40% more than you would a top performer.There are two reasons for this firstly this will make them unexpectedly happy for a while, which should last well into Q1 next year, but better still when you fire them they are less likely to be difficult and will ensure smooth handover of their work.Why would you take this counter-inuitive approach? Well these workers provide the pool you will have to sacrifice in Q1 and maybe mid-year to reduce headcount to meet the unrealistic budget targets that will be set by your own managers if revenues become volatile or other costs go up. If neither of these happens you can manage them out anyway in Q3 leaving you with an even larger bonus pool for the year ahead. Like I said it's a win win situation.

Follow these simple guidelines outlined above and be merry.Don't worry about the long term. Manage for the short term, manage for the stock price, but above all be kind to youself.It's tough at the top.

RB

Excerpt from International Herald Tribune 28/11/2005 follows:

As an ambitious college student, Cassie Napier had all the right moves - flips, tumbles, an ever-flashing America's-sweetheart smile - to prepare for her job after graduation. She became a drug saleswoman.
Napier, 26, was a star cheerleader on the national-champion University of Kentucky squad, which has been a springboard for many careers in pharmaceutical sales. She now plies doctors' offices selling the antacid Prevacid for TAP Pharmaceutical Products.
Napier says the skills she honed performing for thousands of fans helped land her job. "I would think, essentially, that cheerleaders make good salespeople," she said.
Anyone who has seen the parade of sales representatives going through doctors' waiting rooms in the United States has probably noticed that they are frequently female and invariably good-looking. Less recognized is the fact that a good many are recruited from the cheerleading ranks.
Known for their toned bodies, small skirts and persuasive enthusiasm, cheerleaders have many qualities that the drug industry looks for in its sales force. Some keep their pompoms active, like Onya, a sculpted former college cheerleader who on Sundays works the sidelines for the football team Washington Redskins and who asked that her last name be withheld, citing team policy. But on weekdays, she urges gynecologists to prescribe a treatment for vaginal yeast infection.

Wise Fool. Butt head. Idiot Savant. These are all examples of oxymorons. Though Europeans constantly bemoan all things American, the US has given the world a great many good things, Krispy Kreme, Google, cheap designer clothing ( yes- I know its all made in Mauritus or Indonesia or Thailand.Where else would Ralph Lauren, J Crew and Timberland produce this stuff. That's globalisation), and of course the best business schools, or should I say the best business school brands in the world.

A brand is the spiritual sign post of the consumer society. Without them we are all doomed. Just ask the experts. http://www.interbrand.com/who.asp.

Yesterday I opened the FT and the business education ( oxymoron?) supplement fell out. How dreary. It's usually consigned to the bin- but it did set me thinking.

Question : Why do so many talented UK executives insist on taking MBA courses in the UK. Its always been quite a mystery. Aside from the lucky few who are on employer sponsored courses or scholarships, in which case its perfectly understandable. A little time out of the office with a raised gold letterring airport novel and a cigarette under the guise of 'executive development' is always a welcome relief to the mindless boredom of corporate life.

What about the others- why on earth would you spend your own money for a qualification in the UK which in the long term seems to take you nowhere. Albeit the UK MBA graduate will certainly get there quicker.

The approximate cost of an MBA at LBS, including cost of living is around 30,000 GBP/52000U$ for one year full time.Not forgetting the loss of a year's salary and other non- financial opportunity cost. Lets look at what the FT has to tell us http://rankings.ft.com/rankings/mba/rankings.html. If we look at the LBS graduate salary today adjusted for purchasing power parity in U$ it's around 130K U$. Yes - I know the salary today figure doesn't count towards the ranking, but its the universally accepted measure of short term post graduation 'success'. This is about a 147% increase in pre-MBA salary. The real issue isn't this, but what happens in the long term to these graduates. Since the majority of MBA s eventually go into lucrative fields such as consulting or banking, being highly ambitious and full of energy one would assume they would eventually end up at the top of these companies. Why else would you do it? Because case-studies are cool, and courses in business ethics are all really interesting?

Here's a quick test for those hoping to 'invest' in an MBA from a UK business school -Can you name five CEOs, CFOs, CIOs, or even CAOs of multi-nationals or Fortune 500 companies from any UK MBA School? Hard isn't it. That doesn't mean there aren't any, I'm sure there are a few, but then even a blind squirrel finds a nut once in a while. Now do the same test with HBS - George Bush, Jeffrey Skilling, Meg Whitman,Jeffrey Immelt, Jamie Dimon. Its not an accident. Its all in the brand.UK business schools have very little brand value comapred to their US counterparts. Yet people insist on doing them , partly I suspect for logistical reasons. It's local, it's only for one year, bear in mind once you have one the damage is done, you can't undo it.

In the long run UK MBA schools seem poor value indeed.

RB

Mckinsey has a lot to answer for, especially its trade rag - The McKinsey Quarterly. Read any good articles on outsourcing lately. No. It looks like the chaps at JP have. JPM Chase or what ever its called these days.JM Walmart-Chase-Duane Reade has decided to hire 4,500 new graduates in India over the next couple of years. The ultimate goal is that by 2007 30% of its back office work should be located off-shore.Apart from the management consultants who dream up off-shoring, near-shoring and whatever next euphemism for 'job exporting' who wins from this in the short term.The shareholders-not really.The employees-Nope.The Senior management-Yep. How did you guess?. Why is it necessary?Well It's an easy way to increase your margin-all other things being equal it's the logical corrollary of reducing your cost base. Financial companies by their very nature are constantly in search of the better margins,less cost,more economies, scalable business models etc. The accepted wisdom used to be that only basic back office functions could be reliably outsourced,reconciliations,data input. So this never worried white collar employees. Guess what, that's changing. As good employees you all have to be model change agents. Just have a look at some of the outsourcing work in the pipeline at Wipro, Infosys or Tata. The projects are large,complex and sophisticated. It's the turn of the white collar so called Knowledge workers to be outrsourced and things don't look pretty. Where better to start than the finance industry. The retail banks have been doing it for years,just look at HSBC or Lloyds. After the technology melt-down a few years ago the investment banks finally learned some basic principles of financial discipline.Like their real world counterparts in manufacturing,healthcare and autos they began to treat concepts such as recturn on equity,pre-tax margin,compensation/revenue ratios as serious metrics against which to measure their businesses by.These lessons won't be forgotten in a hurry. Who remembers John Mack's arrival at CSFB and the re-negotiation of guaranteed bonuses,or the invite from Merrill HR globally inviting its employees to consider "voluntary separation". The question back and middle office employees at the investment banks should be asking themselves is - who's next. My money is on Goldman.
If you're a Goldman employee think back many moons ago back to 2003,remember Henry Paulson's little gaff.


I don't want to sound heartless," but then proceeded perhaps to do just that.
"I'm going to tell you the facts," he said. "In almost every one of our businesses, there are 15% to 20% of the people who add 80% of the value in terms of their efforts and experience. .......
I think you can cut a fair amount and not cut into the muscle, and be well-positioned for a recovery."


That was in Feb 2003. Bear in mind it's people business, as long as the people are cheap and in another jurisdiction. If you're in Goldman back/middle office remember your its greatest asset.


RB


See full article at Goldman's CEO Apologizes To Staff for Layoff Remarks