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September 1, 2011
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September 15, 2011

#1 Problem in India; Goldman Sachs Wages; Job Creation

"…keeping you great"

HEADLINES:   

Huge Wage Pressures in India — I'm in India this week and the number one challenge, of the four decisions (People, Strategy, Execution, and Cash), is People. Attrition is increasing as it becomes harder to find talent to keep up with the rapid growth of companies attending my workshops – growth on the order of 25% to 100% per year – and these are basic businesses, not internet dot-coms. And compounding the problem are dramatic wage pressures, with wage costs for the BSE-500 increasing 19% last quarter (22% the quarter before). In turn, profits increased just 4.6%.

Coal India Ltd's (CIL) Employees Ask for 100% Raise — though an extreme example, this is further indicative of the wage pressures felt by India's business sector. In fact, India has had the highest increase in wages of all Asian countries the past two years. Here's a Livemint.com article detailing the situation.

Goldman Sachs Wages — so I dusted off some old PowerPoint slides and updated the figures. Prior to the financial crisis I noted how Goldman Sachs, Morgan Stanley, and Merrill Lynch had roughly identical size payrolls and net profits ($11 billion and $5 billion respectively), yet Goldman had roughly half the employees. This translated into Goldman's employees making on average twice that of Goldman's two nearest competitors – the first company to reach over a half million dollars per employee compensation – while having 2.5 times the profit/employee.

The Container Store – in turn, believing that "3 great employees = 1 good employee", one of the Best Places to Work companies, Dallas-based retailer The Container Store, also pays twice industry average wages — $20/hour vs. an industry average of $10/hour – while achieving breath taking sales per sq ft. They also provide first year employees with 265 hours of training and 160 hours/year after that. So my message to firms, before the crisis, was to move in the direction of having less people paid more while providing lots of training. Better yet, double revenues without adding any net-new headcount so you're not cutting people (don't blame me for the job crisis!).

Goldman Update — back to Goldman Sachs and their competitors, so I pulled data from 2010 and found an even starker contrast. Goldman, through the recession, saw profits jump to $8.4 billion while Morgan Stanley's dropped to $4.7 billion. As for Merrill Lynch, it doesn't exist anymore as an independent company! Average wages for Goldman employees are still almost twice that of Morgan Stanley's while profit per employee is up over 3 times. 1 great (well paid) employee does equal 3 good (50% paid) employees.

Get Ahead of the Curve — so my advice to the leaders of India's fastest growing firms this week is to jump ahead of their wage inflation and focus on doubling revenue/employee while increasing wages 50% — resulting in a win, win, win for the employees, company, and the Indian economy – it's as effective in low wage retails jobs as it is in the highest paid industry in the world.

High-Impact Firms And Job Growth — Pam Watson Korbel, a friend and executive coach out of Denver, pointed in her blog today to a 2008 SBA study that revisited David Birch's research which found "gazelles" (vs. all small or large businesses) generate all the net new jobs in an economy. Their overall findings, quoting from the 91 page report:

 

High-impact firms are relatively old, rare and contribute to the majority of overall economic growth. On average, they are 25 years old, they represent between 2 and 3 percent of all firms, and they account for almost all of the private sector employment and revenue growth in the economy.

The surprise finding was the average age, which upon reflection, didn't surprise me. It's the "overnight successes take a long time" phenomenon that accounts for this situation. Anyway, as Watson Korbel notes "I don't think the government is reading its own studies and following them." I couldn't agree more.

Verne Harnish
Verne Harnish
Verne Harnish is founder of the world-renowned Entrepreneurs’ Organization (EO) and chaired for fifteen years EO’s premiere CEO program, the “Birthing of Giants” and WEO’s “Advanced Business” executive program both held at MIT. Founder and CEO of Gazelles, a global executive education and coaching company with over 150 coaching partners on six continents, Verne has spent the past three decades helping companies scale-up. The “Growth Guy” syndicated columnist, he’s also the Venture columnist for FORTUNE magazine. He’s the author of Scaling Up (Rockefeller Habits 2.0); Mastering the Rockefeller Habits; and along with the editors of Fortune, authored The Greatest Business Decisions of All Times," for which Jim Collins wrote the foreword. Verne also chairs FORTUNE Magazine’s annual Leadership and Growth Summits and serves on several boards including chairman of The Riordan Clinic and the newly launched Geoversity. He is an investor in many scale-ups. A father of four, he enjoys piano, tennis, and magic as a card-carrying member of the International Brotherhood of Magicians.

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