Random Thoughts on The City, Wall St & Capitalism

The Harvard Business Review always refers to the C-Suite managers. The C doesn't stand for what you think it does.There is no need to be like that, the C- suite managers are people too, they have feelings as well. The C of course stands for Chief. CEO ( Chief Entertainment Officer), CFO ( Chief Fraud/Fudge Officer - the numbers looked right to me - I had no idea they were wrong! - please not so hard with the hand cuffs - I'm a professional you know), the CAO ( Chief administrative Officer- mostly involves signing for stationery and other stuff).

Today for one day only I am offering free advice, nothing new just practical hints really, on how to max out your compensation for year end.

The 4th Quarter is approaching fast. Most banks, asset managers and other finance houses have reported extremely good numbers for revenue and net profit over the first 2 quarters. Goldman announced record results, even the basket case that was Morgan Stanley announced record results.But as a senior member of the firm how do you make sure you are personally enriched beyond measure for the work of the minions? These are exceptionally profitable times, you should profit exceptionally. But did you notice something about Goldman's compensation ratio, it's falling ( down to 45.2%), and Morgan Stanley's Value at risk figure is down ( from 63$ million to 52$ million). This is not a good omen for employees ( not C-suite managers, they are more in the nature of sinecures and would not count as workers, so you can sigh a breath of relief). This surely means that the revenue and profit outlook in the 4th Quarter is not as robust as earlier quarters. Why keep comp costs down when profits are booming, why take less risk on the trading book unless you think the risk/reward profile is deteriorating.

Now the way it stands at the moment most companies have record profits. The problem as a C-suite manager is how do you avoid sharing it. Think of it like this. The profits are a big cake ( maybe carrot and banana), why divide them among 10 people if you can divide it between 5. You get a bigger part of the cake see.

The only way to do this is to get rid of the other 5 cake eaters, and as a C-suite guy you need to do this fast and certainly before year end. The best and most reliable method of leaving more for yourself is by sacking all the employees. If this was practical I would heartily recommend this, but the next best thing is to start re-structuring, managing people out and offering redundancy. This is the only way you will be able to report exceptional or in-line year end profits and drive the value of your own compensation package up when the shares peak in response to the great results you will deliver in the 4th Quarter, even though trading conditions were very challenging. Hell your paper might become so highly rated you could even take over a competitor and sack everyone in that firm too.Happy days!.

Basic Principles

Get the employees off the payroll fast, do it now so you can take a one-off exceptional for severance costs in Q4 if you have to pay any.No company wants to pay out free money. It's just wrong.Remember you will not have to pay severance in the following circumstances:

1. Encourage Natural Attrition : People who were going to leave anyway can be encouraged to leave by poor performance reviews or my preferred method, 'reverse head-hunting'. Retain headhunters to call the people you need to get rid of and send them on to another firm. This plays to the current employees vanity and self-esteem.Voila you don't have to pay a bonus or redundancy. I suggest a tiered fee structure agreement , not per employee. E.g. if the headhunter can get rid of between 1-50 , pay them X dollars, 50-100 Y dollars. This really depends on the size of your company. Recruitment companies always love to do deals which guarantee certainty of cashflow and earnings visibility.They work primarily on commission remember.

2. The Set-Up:Try to set-up more senior employees up so you can accuse them of gross negligence or misconduct. This usually invalidates the employment contract. This is best done through scrutinising expense claims and implying inappropriate claims ( it doesn't have to be true) ,which is tantamount to accusing them of theft. Or there are other alternatives -get them involved in a harassment claim. Because these employees tend to be older and longer serving this is the best method.They will probably agree to leave quietly and with a small pay-off in return for a good reference so they can find work again to pay the 2nd mortgage and the school fees.Do consider the legal position, the company maybe exposed to an unfair dismissal claim ( the upside for the firm is that in the UK this is capped at around 59K so it's cheaper than paying out a 300K bonus). If you are going to go down this road to get rid of the middle managers- it's best to pick ones that have been with the firm less than a year. The law as it stands only gives you locus standi to bring an unfair dismissal claim if you have more than a year's service. For futher details consult HR & legal.

3.Encourage people to take sabbaticals: Talk to the high-fliers,they generally cost more and have high compensation expectations. Explain how you value all their hard work, why not take a sabbatical as a thanks for all the contribution they have made in making the firm no.1/the best etc. Guarantee them their job back in 6 months. Then while they are away contemplating the meaning of life in The Gambia, at year end give them nothing, piss them off so they don't come back. If they have any self respect they will quit thereby saving you a lot of cash in unpaid severance.If the market goes down the pan next year you can always replace them with someone cheaper and more desperate. It's a short term outlook business, the high fliers should know that. Market conditions are constantly changing.

4.Decimation: If I was honest this is one of my personal favourites. Get a list of all the employees by division, get some interns on work placements ( should be free), ask them to highlight every tenth name, and then make the unfortunate fellow redundant. This always appeals to my sense of capriciousness, it's simple too.The the only draw back is sometimes you end up losing employees who are quite attractive, good to play golf/Bridge/table football with or ones who had a good store of jokes. Sadly sacrifices have to be made. Everyone is replacable.

Other ways of shaving Costs

• Close any restaurant facilities - not because this will save much money but it will make life inconvenient for the workers, if they have half a brain they will realise you simply do not care about their comfort. Since you send the MBA out to get all your coffee why do you care?

• Get rid of gym memberships, dry cleaning,concierge services, business class flights, biscuits, flowers, newspapers. Ask people to bring their own pens, stop the the printing of new business cards,freeze all training ( except legally required stuff e.g Health and safety)these are all small strategies that could throw a lot of people who were thinking of leaving into accelerating their departure. You need to make them feel unloved. It's not a hippy commune. It's a business.

• Pensions- immediately reduce any matching payments into defined contribution schemes. Send out a complicated but dull memo explaining what is happening, but on the same day as announcing other things like some voluntary redundancies. No one will read it. As a C-suite member if you are in any self respecting company you should be Ok.You're on final salary remember.

• Announce cancellation of the Christmas party NOW. This always upsets people. Tell them the company values work place diversity and as a result has decided to not elevate any one religous festival ahead of others.

Conclusion

My advice seems counter-intuitive in these boom times ,but if as a C-suite member you want to profit from this great bull market, you need to starting putting the wheels in motion to get the morons off the payroll. Don't be too harsh though,have a heart, it's only money.

RB