Particle Debris (week ending 11/13) The Expensive Employee

| Particle Debris

Every company wants to grow to be larger. It's a natural part of Western capitalism. Ask any CEO whether he'd rather have 1,000 employees or 2,000 employees, and most will answer with the bigger number. A larger company is an outward sign of success.

Being large in revenues helps too. A CEO who presides over an annual revenue of US$1M can perhaps extract 1% for side efforts, perquisites, and so on. But $10,000 isn't much. A CEO who resides over US$1B in revenues can possibly access $10,000,000.00 for such projects: business jets, new building, etc. In the worst of cases, it's temptation for misuse unless the board of directors is paying attention.

The $/e Factor

The real accomplishment, however, is to have high revenues gained with few employees. In Apple's case, they generate about US$39B annually with roughly 25,000 employees. That's about $1.5M per employee. Let's call that term: $/e. I won't claim that each Apple employee is personally responsible for generating that million and a half dollars, but what is true is that Apple employees work hard, and the $/e is much greater than 2x the their annual pay. (To account for benefits, insurance, 401k, etc.)

Some aerospace companies are notorious for a $/e figure that's barely above the average salary times two. That's because, for some, the principal product is research and documents. Plus, the government won't stand for the aerospace company accumulating wealth at the taxpayer's expense.

When the $/e is close to twice the average employee's salary, U.S. companies feel that they can save on payroll expenses by laying off employees. They try to get by with other employees taking up the slack, working harder, and the executives hope that their company's financial momentum will continue while payroll and benefit expense will go down.

In some cases, the remaining overworked employees become disgusted and think about leaving. To stop that, the executives promise that the company is doing fine, and it's just a temporary measure. If enough critical employees see through the ruse, they'll leave anyway, and the company can suffer irreversible damage, perhaps falter.

In this recession, however, there aren't many places to land, so the result is that the remaining employees have had to cling to their position and work harder than ever.

Apple's Numbers

Apple, however, hasn't had to resort to that tactic. Apple employees, when asked how many hours a week they work, sometimes respond: "All of them." Apple has figured out a way to make every employee's contribution more or less vital, or they wouldn't be there. Apple, if it wanted to, could hire thousands more employees to puff themselves up, but the $/e would go down, and you'd start to see some employees coming to work, putting up their feet, reading a newspaper, and sipping coffee. You don't see that, ever, in the halls of Apple now, and it isn't going to change.

So, it's a good test of your own company to look at annual revenues, the number of employees, and compute $/e. If it's a lot greater than 2x the average employee salary, chances are there aren't going to be any layoffs. But if that number is perilously close to 2x the average salary, then your company is fat. It has too many employees, and the company is puffed up for the sake of effect. Expect layoffs.

The Expensive Employee

The cruelest thing about the whole affair is that those who are let go can be let go with minimal impact on the company. Other staff members who are smarter and more productive can absorb their duties. As a result, these "overage" employees will find it hard to get a job elsewhere. They may very well need to change careers, retrain, or start their own business because they're tainted in the eyes of hiring managers at other companies. Indeed, we may never return to the point where companies in this country have the luxury of hiring those "overage" employees back, merely for the sake of appearance.

Apple's $/e is $1.5M, and that explains the notable lack of layoffs. Microsoft's is about $500,000, and that's still a laudable number. What's your company's $/e number?

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Comments

achaar

Those numbers are great, but don’t forget that both Apple and Microsoft are product companies.  For a services company, the numbers are much less.

confused

For a services company, the numbers are much less.

But all we heard in the period leading up to the recession was how product was passe (i.e. let China do it), and the “new economy” belonged to services…

macjeffff

But remember, they outsource all their manufacturing to Asia. Should those workers be counted? What’s their $/e ratio? Apple has 25,000 employees, but none manufacture products.

rjackb

To say that “overage” employees are less smart and less productive is, I think, speculative at best. Would you care to back up this claim with some evidence?

Don’t forget that many of the world’s most creative and productive people were at their best when they were older. Picasso immediately comes to mind.

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