Archive for the ‘Business’ Category
The financial breakdown of 2008 was caused by a variety of factors from collateralized debt obligations to extreme speculation by financial firms. One area of interest is the pay models at financial firms and how they ended up promoting risk taking and how it’s shaping expectations today.
The de facto practice in the financial world was to reward employees for making bets and compensating them for portfolio market values that only sky-rocketed north. The formula was simple, work hard to generate money for the firm and you will reap a tremendous reward. Working banker hours has been synonymous for not leaving the office till 2AM and sacrificing your weekends. Their labor amounted to a financial sector that boomed:
From 1990 to 2006, the GDP share of the financial sector in the broad sense increased in the United States from 23% to 31%, or by 8 percentage points. The figures on profits are even more striking. For example, the financial services industry’s share of corporate profits in the United States was around 10% in the early 1980s but peaked at 40% last year.
And according to the New York Times, bonuses hit a record high of $38 billion dollars in 2006.
While that was the rosey past, things have changed: Wall Street bonuses dropped 44% in 2008; CDOs became worthless; banks constricted lending; and the business viability of once-strong American companies weakened.
Right now White House officials and the Treasury Department are debating a $100 million dollar question of paying a Citigroup executive for his energy trading team’s performance last year. If they don’t pay him, they are afraid he will leave.
The incentive system that was setup during a booming time has created the expectation of individual rewards. The odd thing is, that hardly exists in other fields. In other fields there is an understanding of company-wide accountability. My background is from tech, and if your company is doing well you receive pay-raises, bonuses, and rewards. If your company is under heat, you cut back and fight it out together during the tough times.
If you are on the team that invents a new chip or device that is going to revolutionize an industry and you work for a giant like Intel or Apple, you will be compensated well, but not exorbitantly. Why? Because your company is a vehicle for your success. Without the resources like Intel’s state-of-the-art fabrication plants or Apple’s rocking brand, your product wouldn’t have its growth potential.
The equivalence in the financial sector is the sheer amount of money that financial firms have at their disposal to make returns on. A talented trader may make 20% returns on a $100M to generate the company $20M. But imagine if they were on their own investing $1000, they’d only walk home with $200 bucks.
So where do the large rewards come from? It’s when you create your own hot start-up or investment fund. Because you take those risks yourself, you reap the returns.
The times we live in are tough. Every generation goes through it at least once in their lifetime. Companies are laying off people by the thousands. A total of 2,600,000 jobs were lost last year. You have companies like FedEx where employees have all agreed to a 5% paycut in order to protect each others jobs. My company, Microsoft, is reducing its workforce by 5,000 people in response to the economic conditions ahead. Companies are all responding in their own unique way, to best position themselves to stay-afloat and competitive.
Staying fiscally responsible will keep a company honest. Large and small companies are attempting to reduce transportation costs, energy usage, and unnecessary services to reduce their expenditures. 2009 is the year to be thrift.
I preface with all this, because I find it extremely reckless that Wall Street is dishing out $18.4 billion in bonuses this year. You are one of the largest culprits of this economic crisis. Remember CDOs? Remember asking for bailout money? As a tax payer, I find your actions offensive.
Why is it so difficult for companies to do the right thing? Think about your image. Here are two examples in both directions:
Bad: Big Three Auto.
I understand executives have busy schedules and need to fly on private jets to maintain all appointments and maximize your time. But, what were you thinking? When going to Washington to ask for bailout money because your companies were failing, why did you fly private? Do you realize, if one of your companies showed restraint and flew commercial or even drove to Washington D.C., you would be in the spotlight.
Bad: Citigroup
What kind of impression does buying a $50,000,000 private plane set? One slip can tarnish your image in the media, and when you are looking for support from tax payers, that is something you cannot afford.
Good: New York Times
Executive Editor Bill Keller serves as a good example where his entire team, if they have to fly, fly coach.
Good: Hyundai
The Korean Car company has been running ads all month encouraging Americans to buy its cars. They concede that times are tough, so they are allowing people who lose their jobs to return their cars. What does that say about their company?
It is not difficult to do the right thing. All you have to do is evaluate every action you take, show restraint and discipline when spending, compassion for your employees, and be aware of the message you are sending.
This morning I received a disappointing email announcing Microsoft would be laying off about 5,000 employees over the next 18 months. I am hoping for the best when it come to my team and my own employment. The people I work with are a talented and intelligent group of people. Unfortunately, layoffs are a sad outcome of all companies during this recession. Some are hurt harder than others, with entire operations shutting down. The reality is that everyone is adjusting to the rough times ahead.
It would be ignorant to think this storm will go away in a short time. The damaging housing, credit, and financial ripple is taking its toll across all of America’s functions. It is like the bullwhip effect you learn in Supply Chain Management. Everyone is trying to react to the variability of supply and demand, as a result people will over estimate and underestimate. It will take some time before things stabilize.
I wonder if things could be done differently. Why can’t companies be more lean and efficient during the good times? Ideally, recession periods are the best time to expand your portfolio and get your edge on your competition. Any company dealing with layoffs will result in inefficiencies, lower morale, and restructuring. This is downtime that can be used as a competitive advantage. Why can’t we think about expanding during rough periods? Why not reinvest in strategic areas to come out as a stronger company?
This can be done, and has been done. Being lean during the good times. Three years ago Mark Hurd enacted cost-cutting in order to tune the company, streamline its operations, and expand its portfolio. Expand your talent during recession periods. After the dot-com bust, there was talent everywhere picked up by Amazon, Microsoft, and other larger companies through smart-hiring and acquisitions.
A few years from now, we will look back at how every company handled this situation. Companies and their leaders will be measured on their reactions, how they dealt with employees, and how they navigated through this unfortunate time.
First competent mover advantage is real. The first person with a great product or story that matches the market establishes the narrative, sets the bar and forces followers to conform to her specs. If you’ve got the good stuff, going first means you’ve set a standard… the consumer now has to abandon you to choose someone else, which means pain and admitting an error. People hate to do that. (Evidence: Pownce).
Seth Godin, Set the agenda by showing up first
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now. —- Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Buy American. I am. Warren Buffet
Marketers spend a lot of time describing a future and making it real. The more general you are in describing it, the farther away people imagine it is. “We’re going to launch a new product next year” sounds a lot more distant than handing someone a prototype and saying, “this launches on January 3rd at 2 pm at CES.”
Seth Godin on making things real.
