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Companies have more to lose from letting staff go today than in prior crises, says new Deutsche Bank research report

Companies have more to lose from letting staff go today than in prior crises, says new Deutsche Bank research report

By Luke Templeman, Macro Strategist, Macro Research.

The experience of the financial crisis shows that a firm’s recovery may highly depend on its staffing decisions. As firms with low returns on equity seek to navigate the current crisis, they should feel encouraged that more efficient staffing decisions will allow them to have a greater say in their own destiny.

Deutsche Bank’s latest research report,Furloughs, layoffs, and recovering from Covid19, concludes that companies are in better shape to withstand the Covid19 crisis than the financial crisis, and have more to lose from letting staff go.

Staffing decisions made during the financial crisis helped determine how quickly a company recovered: US companies with the lowest decreases in staffing during the financial crisis saw their subsequent profits grow at almost double the rate of companies that had the largest amounts of lay-offs. This was a trend replicated in Europe.

“Perhaps the biggest difference between the financial crisis and today is the huge increase in furloughing rather than permanent layoffs,” says Luke Templeman, Deutsche Bank research analyst and author of the report. “There are three reasons for this: most economists and firms expect the Covid-19 crisis to be short, albeit deep; there is a greater risk of reputational damage in laying off staff; and staff have increasingly become more important to companies.”

Luke Templeman

Luke Templeman

The report analyses several metrics to determine the importance of staff. First, companies now make a lot more profit from each of their employees than they did in the past. Large US companies generate over US$55,000 per staff member each year, a significant jump from the roughly US$38,000 generated just in the boom time pre-financial crisis. Meanwhile, European companies generate just over €33,000, a little higher than the pre-crisis level, however, a strong climb since its aftermath.

Second, the report examines the Human Capital Return on Investment (RoI) by taking a deep dive into the financial accounts of individual European stocks.

Release 1 | 2 One unexpected result is the relationship between Human Capital RoI and subsequent share price movements, Returns on Equity (RoE), and a firm’s overall staff costs. In short, the higher a company’s staff costs, as a proportion of its total operating costs, the lower its Human Capital RoI. This suggests that in firms where staff costs are not a large proportion of the cost base, managers are less troubled by ensuring that new hires are justified, and they therefore bring lower returns. This might be easy to explain if these companies were young, high-growth companies. But this is not the case: the sample of low-staff cost companies was dominated by energy, utility, and consumer firms.

It is also quite striking to see which companies exhibit the strongest relationship between RoE and Human Capital RoI. Companies in the top quartile for RoE see very little correlation with Human Capital RoI, while the worst stocks have the strongest positive relationship between RoE and Human Capital RoI.

Templeman adds: “From our sample of large companies, we find that companies that are struggling may have the most to gain. This implies that, if the worst performing firms can increase the efficiency of their hiring decisions, this can have a substantial effect on their returns.”

The good news for all is that firms are in better shape to withstand the current crisis, stimulus schemes notwithstanding. Due to the expansion of company margins since the financial crisis, companies have the ability to “hold their breath” for longer without experiencing any sales.

Global Banking & Finance Review

 

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