Its been so long since I wrote anything on my blog apart from poetry. So I thought I will take a break from my poetry (which is anyways not so great that anyone is ever going to miss it if I did not write more) and write something about the job cuts (over 80,000) which has happened over the last two weeks. This particular news has disturbed me much more than any other news of past few days. Not that I didn't abhor the attacks on women in Mangalore pubs or that I didn't hate the grim response of Pakistan to the proofs provided by India, its just that this particular news forced me to question the wisdom of the very people whom I always considered as the smartest people around.
Let us do some analysis of the issue. Open any business newspaper and the first thing you will notice is that company XYZ announced 10,000 job cuts owning to bleak consumer spending forecast for next year or company ABC announced 15,000 job cuts to cut down the operational cost and boost up the profits. A close look at the solution used for a bleak consumer spending will simply reveal that by firing people companies are themselves making the future even bleaker. Say, company XYZ fires 10,000 people because it thinks that demand will go down next year but by firing 10,000 people isn't it aggravating the problem by reducing the purchasing power of 10,000 families (or roughly 40,000 people assuming avg. family size to be 4)? So over that past 1 year, the corporate America has simply pushed out 2.3 mn families (roughly 1 crore people) out of the consumer segment. Just to make the things worse, it will further create a panic among the people who have a job but will try not to spend on anything non-essential so that they can survive the bad times in case they also lose their jobs.
Now let us look at the problem from companies point of view. They claim that they are reducing the headcount to reduce their operational expenditure. I still wonder if it is really going to solve any purpose. Open ANY companies' financial statement, you will notice that employee costs are hardly a fraction of overall expenditure. So even a 20% reduction in headcount won't do any good to the company. Yesterday only in Economics Times I found the financial results of following companies and I am putting the expenditure numbers and employee costs numbers to just prove my point typically how insignificant the employee cost contribution is to the total expenditure. Though the table below shows only Indian companies and were profitable in 2008 but I am assuming that same pattern will also hold true for US companies and the cost split will remain more or less similar even for a loss making company. The companies I have mentioned below belongs to diverse sectors like Infrastructure, FMCG and Electronics etc, which means that my hypothesis that normally contribution of Employee costs to total expenditure of a company is valid across the sectors:
| Company name | Total Expenditure 2008 (in Lakh INR) | Employee Costs 2008 (in Lakh INR) | Other expenditure (general/administrative expenditure) 2008 (in Lakh INR) | Ratio of Employee Cost to Total Expenditure 2008 (in Lakh INR) |
| GMR INFRA | 67,136 | 7,476 | 7,672 | 0.111356053 |
| Refex Refrigerents | 1,718 | 56 | 322.62 | 0.032433062 |
| Bartronics India Ltd. | 10,915.02 | 646 | 1005.85 | 0.059181751 |
| Daawat LT foods ltd. | 23,916.87 | 583 | 3631.4 | 0.024370246 |
| Selectron EMS India Ltd. | 3,800.67 | 173 | 596.03 | 0.045489348 |
So looking at the table above, it is clear that even if these companies were to fire say 40% of their staff to save costs, they can hardly save say 4.5% of the total expenditure which, according to my opinion, can easily be saved by reducing the next column i.e. general and administrative expenses.
Now going a step further, a keen observation at the staff fired will reveal that these jobcuts are mainly for the people at lower section of company's hierarchal pyramid who are anyways not paid much. So for example, Bank of America announcing a job cut of 35,000 people over the next three years is a outright foolishness which they might regret once the markets pick up again. To prove my point, I will use some real statistics and few assumptions. My assumption is that people being fired mainly belong middle level management to employees who work at the lower level positions. I will assume that the average expenditure Bank of America incurs on these 35,000 employees is 100,000 USD per year, which is indeed a very liberal assumption cosidering that average salary of people passing out from HBS is roughly 100,000 USD per year. So the total cost savings by firing 35,000 employees over three years will be roughly 3.5 bn USD over three years. So yearly savings are roughly 1bn per year. Now how does that compare with the total salary offered to the top people of the company, I putting the following table from Bank of America's 2007 annual report:
| Name | Base Salary ($) | Cash Incentive ($) | Restricted Stock ($) | Total Cash Incentive & Restricted Stock ($) | Stocks Options (#) shares | Value of stock options (as of end 2007) |
| Kenneth D. Lewis (CEO) | 1,500,000 | 6,750,000 | 11,750,000 | 18,500,000 | 333,333 | 13333320 |
| Joe L. Price | 800,000 | 3,245,000 | 3,955,000 | 7,200,000 | 166,667 | 6666680 |
| Amy Woods Brinkley | 800,000 | 3,245,000 | 3,955,000 | 7,200,000 | 166,667 | 6666680 |
| Barbara J. Desoer | 800,000 | 3,245,000 | 3,955,000 | 7,200,000 | 166,667 | 6666680 |
| Liam E. McGee | 800,000 | 3,700,000 | 5,000,000 | 8,700,000 | 208,333 | 8333320 |
| Brian T. Moynihan | 700,000 | 3,310,000 | 3,990,000 | 7,300,000 | 166,667 | 6666680 |
| R. Eugene Taylor | 800,000 | 3,700,000 | 5,000,000 | 8,700,000 | 208,333 | 8333320 |
| Total | 6,200,000 | 27,195,000 | 37,605,000 | 64,800,000 | 1,416,667 | 56,666,680 |
The table above shows that only top 7 persons of BoA were given total benefits of about 112 USD at a time when the turbulent environments were approaching. It wouldn't surprise me if top 1000 people in the organization were given total benefits of say around 1 bn USD (though I must admit these emoluments are very less when compared with some of the other CEO of companies of equal size). The table on the left shows the highest paid CEOs of 2007.That shows how irrational it is to cut jobs to reduce the costs specially the people whose costs hardly have any impact on the company's balance sheet. I am sure these kind of actions will push not only the company but also the whole economy from gloom to doom.
