Let’s say it’s the mid-1990s and you’re a senior at an Ivy League college on the east coast of the United States. For most of your undergraduate career, you’ve been debating whether to go into medicine or teaching – you’ve always cherished the idea that one day you’d do some good in the world. In the last few months, though, a third option has crept into the mix. It seems that the most talented people in your year, the half-dozen overachievers who’ve been your competition since you were a freshman, have all signed up for postgraduate business degrees. They want to be investment bankers, they tell you, or go into private equity. They want to measure themselves against the best, they say. They want to work on Wall Street.
You delay the decision for as long as possible, but somehow you know your mind’s made up – you must continue to pit yourself against the elite of your generation. So you enrol at Wharton Business School, and a few years later you leave with a degree that gets you a job as a junior assistant at Merrill Lynch. For almost a decade you put in ten- to fourteen-hour workdays, trying to catch the attention of the partners. You succeed. By the time you’re in your early thirties, you’re a trader earning US$180 000 a year. In 2006, aged 32, you take home a bonus of US$5 million.
Comparatively, that’s not too bad. You’re doing better than many, worse than only a few. According to the New York Times, there are one hundred people at your firm that year –
employees on the salary wrung just below you – who take home bonuses of US$1 million. But at Goldman Sachs, your firm’s major competition, you have it on good authority that fifty people got bonuses of US$20 million. And then there are the guys at the top. Goldman’s CEO, Lloyd Blankfein, is rumoured to have cleared over US$60 million. Your own chief executive, E. Stanley O’Neal, pocketed US$46 million.
Two years later, over a September weekend that will go down in Wall Street history, your 94-year-old firm is sold to Bank of America for US$50 billion, sidestepping the bankruptcy that awaits Lehman Brothers the following Monday. And while it’s plain to every banker you know that something fundamental has shifted on the Street, nobody seriously believes there’ll be no bonus season in 2008. Bonuses, after all, are the entire point of the game.
As for the global consequences of the game, you can’t be expected to take any heat for that. I mean, c’mon, you didn’t invent the system, you just played it, did what was expected. How were you supposed to know that in a country called South Africa, where the income gap between rich and poor is amongst the highest in the world, your industry’s example would compound the problem? What does it have to do with you that executives at a power supplier called Eskom got richly rewarded for failing to do their jobs? How is it your fault that some airline CEO named Khaya Ngqula paid himself monthly retention bonuses on the taxpayers’ dime?
You have nothing to do with any of it, you tell yourself. Like most of your colleagues, what still concerns you most is the size of your annual cheque.
The story of Merrill Lynch’s post-collapse attitude to employee remuneration – and the attendant story of why many Merrill employees still believe they are entitled to their annual windfalls – is worth telling for two reasons. First, it’s an attitude that’s garnered far less press than that of global insurer AIG, whose decision to award staff bonuses soon after receiving US$85 billion in government bailout money provoked the ire of millions of US taxpayers; second, in its under-the-radar manner, Merrill’s attitude appears to be emblematic of the majority of Wall Street banks that have been devastated by the current crisis. Put another way, what makes the Merrill story interesting is that nothing about it is exceptional.
The story starts in 2006, when the company’s earnings were US$7,5 billion, an all-time record. That year, more than half of the revenues were generated by the fixed-income division, which meant that around a third of the total US$6 billion bonus pool got allocated to the division’s 2 000 employees. It didn’t matter that a large percentage of these revenues were linked to financial instruments whereby risky home mortgages had been converted into bonds, or that the fixed-income division (which had devised the instruments) pushed yet further into the mortgage business even as the housing bubble began to burst – it didn’t matter, because by then all the bonuses had been paid.
As mentioned, at the top of the bonus pile that year was the CEO, E. Stanley O’Neal. Following him (although not too closely) was Dow Kim, head of the fixed-income division, who was awarded a bonus of US$35 million. In third place, at US$20 million, was Kim’s deputy, Osman Semerci. Although the company has since written down its investments by around US$54 billion and subsequent losses have amounted to more than three times the 2006 profit, neither O’Neal nor Kim nor Semerci were ever asked to pay a cent back. In fact, when it became apparent that O’Neal had driven the firm to the precipice through his aggressive and reckless strategies, he wasn’t even fired – he was allowed to resign, which entitled him to a further US$161 million in deferred compensation and stock.
So it came as no surprise when, in December 2008, O’Neal’s replacement, John Thain, requested a US$10 million bonus for ensuring that Merrill didn’t meet the same end as its long-time rival Lehman Brothers. Thain had been lured to the firm by a US$15 million signing fee and a multi-year pay packet that was supposed to be worth between US$50 million and US$120 million, dependent on what he did with the share price. But because of the huge toxic debt he had unwittingly inherited, the ratcheted targets became a mirage – all he had to show for his efforts, after the signing fee, was his US$750 000 salary. Surely he was entitled to a paltry US$10 million for saving the bank; a number, as Vanity Fair writer Michael Shnayerson wryly noted, equivalent to a ‘25-cent tip on the deal’ with Bank of America.
Unfortunately for him, and much to the concern of bankers everywhere, Thain wasn’t entitled. Merrill’s directors couldn’t help noticing that public opinion had turned against them – Bank of America had recently been awarded US$15 billion in taxpayers’ bailout money, and was now about to take the US$10 billion earmarked for Merrill – and a bonus for the new CEO would send the wrong message. Also, there was New York attorney general Andrew Cuomo to consider, a man who was making his name by leading a crusade against outsized executive compensation at firms that had been saved from bankruptcy by the federal government. In October 2008, Cuomo sent a letter to the boards of firms including Goldman Sachs, Morgan Stanley, JP Morgan Chase and Merrill Lynch itself, laying out in emphatic terms his aversion to the awarding of bonuses under current circumstances. In November, apparently succumbing to the pressure, Goldman CEO Blankfein announced his intention to forgo the year-end package that between 2003 and 2007 had netted him over US$210 million; all he would be taking this year, Blankfein said, was his US$600 000 salary. A few weeks later, the chief executive of Morgan Stanley, John Mack, followed suit.
Which begs the question: In December 2008, when Thain insisted on his right to a US$10 million bonus, was he just being stubborn? Or were the ‘magnanimous’ gestures of his peers perhaps a bit too much for him to stomach?
As Vanity Fair’s Shnayerson observes, the 440 partners at Goldman Sachs are taking bonuses this year: ‘Maybe in many cases not the $12 million to $15 million each got in 2007 – more like packages worth $3 million to $4 million.’ Bizarrely, the US$10,9 billion in compensation and benefits that is to be divided amongst Goldman’s 30 000 employees is exactly equal to what US taxpayers have recently handed the firm in bailout money.
A Goldman spokesman, clearly flailing, explained to Vanity Fair that employee compensation comes out of ‘business activities’, meaning a different place on the balance sheet to where the government cheque sits. Either the spokesman’s words betray the fact that investment bankers think non-investment bankers are financially illiterate, or he genuinely believes that despite a US$7,2 billion write down in toxic securities the Goldman staff deserves to be rewarded. Or both.
The story at Morgan Stanley and AIG is much the same. Taxpayers still seem to be footing the bill for the lavish lifestyles of countless financial executives whose short-term thinking (fuelled by irrational reward structures) dragged the United States – and the world – into this crisis to begin with. Examples of Wall Street’s deeply entrenched pathologies abound. At Merrill, for instance, the new head of growth and acquisitions, who started work in September, was retrenched after only three months on the job because of the sale to Bank of America. His contractual severance package, according to the Wall Street Journal, may have been as high as US$25 million. No wonder Thain was embittered by his board’s unwillingness to throw him a meagre US$10 million for actually doing some work.
Viewed in this context, the compensation saga involving former SAA chief executive Khaya Ngqula is different in degree but not – arguably – in kind. Ngqula was suspended in February, pending the outcome of an investigation into an alleged conflict of interest. The source of Ngqula’s troubles was his assumed interference in the award of a R3,5 billion catering contract to a consortium whose shareholders included his wife and his business partner. While on the surface it may appear that none of the Wall Street CEOs have been tainted with a smell of corruption quite as pungent, at a few levels down it starts getting harder to distinguish the stink. Like hundreds of Wall Street high-flyers, Ngqula appears to have enriched himself at the ultimate expense of the taxpayer – over the last few years, bailout payments to the national carrier from South African government coffers have run into the billions.
Yes, Ngqula took helicopter rides to same-city meetings at the South African citizen’s expense. But we’d do well to remember that one week after AIG was promised US$85 billion from the US government, the firm’s top employees went on a hugely expensive junket where spa charges alone amounted to US$23 000. Yes, Ngqula was paid a R68 000 monthly ‘retention bonus’, his golden handshake is rumoured to be R8 million, and his slice of the allegedly improper catering contract is anyone’s guess. But should such numbers not be viewed in the light, say, of Merrill Lynch’s US$161 million parting gift to E. Stanley O’Neal? Or the US$600 million in ‘retention awards’ that AIG will split amongst 5 000 key employees despite the unprecedented public outcry?
Which of course does not absolve Ngqula or his cronies of charges of undue enrichment. It just begs the question whether the fault’s with the system-at-large, a system that starts on Wall Street and spreads throughout the entire free market world. When the majority of a country’s brightest students aspire to be the 32-year-old in Manhattan who’s pulling down a US$5 million bonus, when pay is decoupled from the long-term health of a firm and anchored only to short-term profit, when humungous retention packages are awarded for just showing up, there’s bound to be a whole lot of collateral damage. Ngqula, it seems, is ours.
Like hundreds of Wall Street high-flyers, Ngqula appears to have enriched himself at the ultimate expense of the taxpayer – over the last few years, bailout payments to the national carrier from South African government coffers have run into the billions.
We Need To Unite For A Better Entrepreneurial Future!
Here are my key entrepreneurial tips from The Passport Showcase.
In our modern world, where nationalists walk the street and xenophobic beliefs are on the rise, as a Zimbabwean serial entrepreneur and motivational speaker, I’ve identified that we need to bridge this division and unite us all through celebrating our diversity.
We need to come together not because it’s the right thing to do, but because united, we can work towards a profitable future. However, before this can happen, we need to change the global mindset. That’s why I transformed my book The Passport into a showcase in which performers from across the continent took part and showed off their talents.
While preparing for the show I noted some important lessons that I learnt along the way. Here are my key entrepreneurial tips from The Passport Showcase.
Success can’t happen in a vacuum!
Setting up The Passport Showcase took a lot of collaboration. As an entrepreneur and a believer in a united Africa, I’ve learned you can’t operate a successful business if you’re not willing to work and deliver services to everyone. It’s for this reason I invited fashion designers, artists, and dancers, to come together and educate us about the dangers of xenophobic beliefs through their art forms.
We need to be able to blend skills and overcome our preconceived notions, in business and the arts, so that we can achieve great things.
Education is the key to every problem
It’s a part of starting any business; educating the public about your company and quickly converting them into consumers. Arguably the same was true of the showcase, creating a truly unique experience to inform the public about celebrating diversity.
Helping individuals understand that acceptance is key for a better future is critical for business expansion. If any of us want to expand our businesses, we need to be able to engage with different markets – who won’t chase away the unknown.
Identifying a new opportunity is one of the fundamental building blocks for a new business. Finding unique solutions is a truth that echoes across corporate industries and the arts. But change can cause concern and adverse reactions.
On our continent, ideas that disrupt the norm are needed to catapult our brothers and sisters to a brighter future. But this can only be achieved when we celebrate our diversities and collaborate.
9 Ways To Elevate Your Small Business To The Next Level
The South African economy is strongly supported by the nation’s entrepreneurial spirit, which encourages a culture of growth and development in communities.
With the unemployment rate currently at 27.71%, people of all ages and backgrounds are looking for an opportunity to work.
Although many entrepreneurs have enjoyed great success on their small business journeys, choosing to start your own business comes with many risks. One of these risks is the financial burden it can bring. While there are various challenges faced by small businesses, it is possible to overcome these and jumpstart your business with these useful tips from FedEx Express, the world’s largest express transportation company.
1. Connect with customers
As a small business owner, it is important to know who your customers are, where they spend their time, what they are looking for and how your business can meet their needs. Times have changed and waiting for customers to come to you is no longer a feasible business strategy. In today’s evolving business environment, entrepreneurs need to be approaching their customers and building strong relationships with them to form a lasting impression. If your small business cannot grow its customer base, it cannot grow profits.
Attending networking events will allow you to find professionals and other small business owners who offer services your business may require. Many small business owners get this critical aspect of starting a new business wrong by networking purely to gain customers, not realising that networking with other business can assist you in acquiring the services you need to continue the growth of your business. Small businesses have a lot to gain through networking at the right time and at relevant events.
3. Use social media
There are a number of social media networks and social networking platforms that can drastically grow your business, however, it is important to understand your customers and identify the channels they prefer to communicate on. By implementing a comprehensive social media strategy, you can ensure social media works as a driver of new business that positively promotes your service offerings.
4. Build customer loyalty
Building customer loyalty begins with great customer service. Great customer service starts with a positive customer experience and first impressions are vital in this regard. If a customer has an enjoyable experience when using your services, it is likely they will return and use your services on an ongoing basis. By ensuring your business has a user friendly website and informative brand collateral, new business prospects will increase and those who have experienced quality customer service from your business are likely to refer you to friends and colleagues.
5. Ask for help
All small businesses face challenges, particularly in the early operational stage. This is why asking for help from your peers/mentor who may be more experienced than you is critical. Tapping into the mind of someone with more experience and a broader knowledge base will ensure you learn and acquire the skills needed to make a success of your business. The FedEx Small Business portal offers business owners useful advice that will assist you on your small business journey. Visit www.smallbusiness.fedex.com for tips and success stories that will inspire and help you to grow your small business.
6. Hire the right people
Each person that forms part of your business needs to share the same vision with you that will drive growth. Your workforce will be responsible for the success of your business therefore, ensuring your staff remains motivated is important. When hiring a new employee, implement a check list that includes traits that you feel are imperative to the culture of your business.
Asking out-of-the-box questions in the interview will also assist you in determining if the potential employee is a suitable candidate to fill the open position.
7. Manage cash flow well
Many small businesses close due to cash flow problems. Managing money spent versus money earned is critical as it provides you with a clear indication of whether your business is running at a loss or whether you are excelling. If your small business is losing money, you can implement a strategy to iron out the issues that are contributing to this and identify ways that will ensure your business generates profits.
8. Work to build success
Work to make a success out of your business with your employees by being involved in the everyday activities that are critical to your businesses success. Being involved will ensure employee morale remains high while allowing you to identify areas that need improvement.
9. Find inspiration
There will always be someone who has been in your current position, even if it is a different business to yours. Learning how they made a success of their business during hard times will provide you with the knowledge you need to succeed as a business owner. Starting your own business is a learning experience made easier by speaking to others who inspire you.
A business can safeguard its success if it continues to innovate. For example, e-commerce has changed the way the world conducts business, and the rise in technology has made it easier to interact with customers quickly and across borders. With economies becoming more interconnected, companies large and small are now able to access markets that were previously unattainable. E-commerce will assist small businesses in establishing their territory in the market and as a result, guarantee growth and longevity,” concludes Higley.
How Algorithmic Forecasting Can Improve Business Efficiency In Challenging Economic Times
Harnessing the power of predictive analytics, in-memory computing, and artificial intelligence to forecast risks will help entrepreneurs stay ahead.
The ability for businesses to accurately predict risk and develop insights has traditionally involved manual drudgery, spreadsheets, and been confined mainly to the finance department.
With the advent of new technologies such as predictive analytics, in-memory computing, and artificial intelligence (AI), smart Chief Finance Officers (CFOs) are harnessing their power to automate the process, free up human capacity, and get deeper, more accurate insights.
The success of any business, from small start-up to large enterprise, depends on how accurately they can predict future performance, as well as recognise and respond to warning signals.
Deloitte recently launched a report titled Forecasting in a digital world, the sixth in its Crunch Time series for CFOs, which delves into the advantages of algorithmic forecasting and why it will change and challenge the way businesses look at and consume data.
There is a shift away from having people gather, compile and manipulate data, to handing over the menial work to the machines – which employ data-fuelled, predictive algorithms to sift through historical data and use statistical models to describe what is likely to happen in the future.
It is a process that relies on warehouses of historical company and market data, statistical algorithms chosen by experienced data scientists, and modern computing capabilities that make collecting, storing, and analysing data fast and affordable.
Algorithmic forecasting is a well-oiled machine, with more than 80 percent of the work happening automatically. Every piece of financial data a decision maker could want is available on their device and all they need to do is ask—literally.
How it change the workforce
While it seems like the machines are taking over, humans are not left entirely out of the process. The success of algorithmic forecasting depends on collaboration with the machines and among people from different teams, including finance, data analytics, and business.
The business finance talent model should evolve to keep up with changes in how work gets done and that will likely require a different mix of people than what organisations have in place today.
However, once they hit their stride, these teams can move across the range of forecasting needs, embedding capabilities in the business and driving integration. These teams are integral to establishing an algorithmic solution that can work for the business, bring insights to life within the organisation, and support continued business ownership of the outcomes.
How it changes the workplace
The new teams required for algorithmic forecasting to succeed and the pulling of human resources from other departments will need the workplace to evolve into a more collaborative space, banishing outdated silos.
Forecasting is not limited to finance but all functions, from marketing to supply chain to human resources – basically all functions that need to predict the future to drive important decisions.
While CFOs may not lead function-specific forecasting, they should help shape these forecasting initiatives since finance will inevitably use the outputs they generate.
A shared forecasting infrastructure — even a physical Centre of Excellence (CoE)—can help improve collaboration and coordination while providing efficiencies in data storage, tool configuration, and knowledge sharing.
The beauty of algorithmic forecasting is that once the work is done to solve one specific problem, the same process and capability can be extended and applied in other areas.
Algorithmic forecasting doesn’t create anything out of thin air and it doesn’t deliver 100% precision. However, it is an effective way for getting more value from planning, budgeting, and forecasting efforts.
A commitment to algorithmic forecasting is both cultural and statistical. Making it happen involves people working with technology – neither is enough on its own. Every company will make its own unique journey from its current approach to planning and forecasting to an improved approach.
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