Tuesday, 9 December 2008

The number or the headcount?

Imagine for a moment that you are the CEO of a large retail bank. One morning, there is a knock, and the chief financial officer pokes her head around the door.

"Bad news, chief" she says. "We made some bad calls on MBS investments; mortgage arrears are rising; and our credit card clients are having serious repayments difficulties. It all adds up to one almighty loss this year. In fact, this year's write offs are now equivalent to our previous 30 years of profits".

Thirty years? That was 1978, when you joined the bank as a graduate trainee. Yes, the CFO is telling you that under your careful management, you have wiped out a lifetime of earnings. No wonder the bank's share price is down 90 percent and the government is threatening nationalization.

The CFO continues; "these losses raise a tricky issue. What are we going to do about the numbers this Christmas".

The numbers is the inhouse word for the annual bonuses, where each staff member receives a multiple of their annual salary. A banker measures her self worth by the annual number.

"This year's write-offs are so large that we simply don't have the revenue stream to support anything like last year's payouts".

Naturally, you are a master of delegation, so you ask the CFO "what do you advise?"

"Broadly speaking, there are two options. We could divide whatever is available among existing staff or we could reduce the headcount, which would allow us to pay higher bonuses for the remaining staff."

So what would you do? Would you go all socialist, spare the staff from a painful downsizing, or would you try to maximize the average size of bonuses?

Sharing was never your strongest quality. Equality sounds a lot like a low number for the CEO. In any case, the number will win every time over the headcount.

This is why there will be blood on the streets of the city this winter.


Man in the city said...

It has been the headcount for about a year. The great bank cull has begun.

dearieme said...

His mistake is to ask the CFO. He should have asked an economist.
"Macroeconomics is the practice of looking for correlations between poorly defined and badly collected aggregates over cherry picked time intervals meticulously ignoring inconvenient factors in order to justify preconceived notions. What makes this different from astrology?"