There are two paths to profitability: growth and cost reduction. In the financial services industry especially (all though not exclusively) where compensation cost might represent 50% or more of expenses, cost reduction in the manner of headcount reductions can be an effective approach to corporate revitalization. The December 15, 2010 article by msnbc.com news services, Wall Street bonuses may top last year’s as earnings soar: Securities industry is on track for second-highest level of profitability well illustrates how the financial services sector has cut its way to profitability with large bonuses for the executives who remain. The article states that: “Despite the weak U.S. economy,  could be the second most profitable for New York City’s securities industry, and the average bonus may top last year’s because so many bankers and brokers have been laid off, the state comptroller said in a report on Wednesday… The high-paying industry only employed 160,200 people in September, down from a peak of 200,300 in December 2000.”
Successful businesses are by definition, efficient engines. They pursue durability and profitability in the most effective way. For the financial services industry that is work force reductions, but for the US economy as a whole fewer jobs will do little to spur full recovery. With 9+% unemployment, the US economy needs jobs, not just profits, to recover. The predicted economic growth of 3% to 4% for 2011 is encouraging but it is important to note that it is propelled by tax cuts (or if you prefer the extensions to the existing tax rates) but anchored down by unemployment and the continuing housing crisis.
The article particularly spotlights Goldman Sachs noting that the bonuses to be paid to Blankfein and other top executives are far lower than those paid in 2007 reflecting “…a 24 percent decline in the value of the bank’s stock.” Touted in Bloomberg as “Wall Street’s most profitable bank” it seems that Goldman’s executives aren’t suffering much, except from bad publicity that can only continue to fuel the fires of Main Street discontent.
The real question is what do Goldman’s executives and its Board of Directors see for Goldman’s future and is it a bellweather for US businesses? With the stock price still a long way from its high of over $235 per share in 2007, are Goldman’s executives getting all they can now?
Goldman is, as we saw at the start of the economic crisis, if not “too big to fail” then certainly too well connected. The people who paid for the excesses, opacity and greed of Wall Street are the 6 to 8 million American who lost their jobs, and there is little that Wall Street, Pennsylvania Avenue and Capitol Hill have done to repay them, other than extending unemployment benefits, which some naysayers (usually those with secure, well paying positions) contend only exacerbates the problem by providing an incentive for people to stay unemployed rather than take a job. (For more on this subject see our blog “Unemployment: Who or What is to Blame”.
What we know for certain is that our overall economy will be stronger when companies can again follow the “growth path” to profitability rather than the “cost reduction” path.
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