In yet another sign of the times, two of the biggest headlines on the Wall Street Journal online today were stories about companies cutting costs at the expense of employee compensation. First, in light of the worst economy that the company has seen in its 35 years, FedEx Corp. (FDX) is trimming more than $1 billion in costs with much of that coming straight from employee paychecks. The largest cuts will come from the largest salaried employees, with the CEO taking a 20% haircut. This is a sign of the times as the international freight and shipping company has experienced negative revenue growth as global trade slows and the big drop in fuel prices has not been sufficient to overcome the overall slow-down in business. FedEx reaffirmed its full year profit guidance of $3.50 to $4.75 a share but, given the uncertainty of the near term, refrained from issuing guidance for the next quarter.
This follows a clear trend as companies throughout the economy are slashing personnel costs by either reducing their workforces or paring back compensation for those still employed. According to Bloomberg, Goldman Sachs (GS) just slashed average compensation by an unbelievable 45% and some bonuses may be down as much as 80%. It would appear to me that employees at Goldman or FedEx should prefer weathering the storm with lower pay rather than no pay at all, which many companies are having to do in order to reduce payroll expenses. Employees have little leverage in this job market and most know it. Unemployment is rising and, unfortunately, I expect to hear more daily announcements of corporations reducing staff across the board for some time to come.
In a far more creative offering and one that has not gotten a lot of attention, Credit Suisse (CS) plans to give away mortgage-backed and other illiquid securities as bonuses this year. Now that is bold! The toxic assets that the bank cannot unload on the free market are to be allocated to employees via bonuses. However, employees will potentially be required to pay taxes on these “bonuses”. The plan will give managing directors and directors a stake in up to $5 billion or around 13% of the bank’s collective risky debt. A source was quoted as saying the debt will be comprised of 60% buyout loans and 40% mortgage-backed securities.
On the surface, it sounds like a pretty raw deal for Credit Suisse employees, but the firm has developed a clever solution that has the potential to be a winner for all parties. Obviously, over the short-term, the bank gets to remove some of its most risky debt from the balance sheet while both preserving precious capital and maintaining its high-level-employee bonus structure. Had the bank wanted to give out traditional cash bonuses–a PR challenge in this era of government bailouts– then employees would have to expect that the amounts would have been greatly reduced, even in a best-case scenario. Employees stand to benefit greatly over the long-term from this package, if the economy can regain its footing and these currently-toxic assets return to a more favorable valuation. If this program eventually works out well for the employees, Credit Suisse may also benefit from better employee morale and loyalty in future years. Remember, Credit Suisse has already cut some 10% of its staff as a result of painful loss of 3 billion Swiss Francs in just the first two months of the 4th quarter. Surviving staff, probably top performers, could use some good news at this point.
I applaud the ingenuity of CS management for making lemonade from lemons, so to speak. The risks are minimal to employees who could not have been expecting much from the struggling firm this year; however, the potential reward could be a nice perk for patient employees. I would not be surprised to see more financial institutions with gobs of illiquid debt consider similar creative plans to spread their risk among their employees.