What is Management Share Option Plan (MSOP)?

When a company is doing very good, its board may decide to reward the management so that their good work (i.e. Increasing valuation of the business) is encouraged. This may be in the form of awarding more shares from existing shareholders to management team members. This at first may seem that detrimental to shareholders as it reduces shares allocated to them. However, this is usually done when management can increase valuation of company to a higher number by securing external investment or funding.

Although in mathematical terms the % ownership of each common individual shareholders reduces, the absolute amount of their investment increases. For example, this may mean share going down from 10% to 8%. However if original valuation of company was $100,000 and new valuation is $200,000 then corresponding shareholder’s wealth is actually increased from $10,000 to $16,000.

Of course management can reward them in alternate ways like paying them more dividend. However, MSOP is sometimes used as a tool to recover some ownership of business for other shareholders by major shareholders like management team. For young companies releasing cash via dividends is always good choice. So depending on company and situation and shareholders consent MSOP is exercised.

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Why McKinsey consultants do not divulge even their clients’ names?

Consultants from well known management consultancy firm, McKinsey, is famous for keeping secrecy. So much so, they do not even disclose the names clients they are working from.

McKinsey do not explain any reason why the it is the case. All they say that they do it to protect clients interest. Actually there is a real reason behind the secrecy. McKinsey consultants often advise competing organizations. For example, if Coke discovers that McKinsey is advising same strategy to Pepsi, neither company will be happy. Statistically it means, in any industry, McKinsey can advise only 50% of the companies (the rest will be their competitors). But by hiding their work in secret cloak, McKinsey can work for multiple companies in same industry at the same time!

Remember, as McKinsey charges very high consultancy fees (in the region of $10,000 per consultant per day) from its clients, only very large companies can afford to hire their service. Thus, if they are prejudiced against hiring by their clients (because they discover that McKinsey is also serving their main competitor) then they (i.e. McKinsey) will lose business.

This may lead to an ethical question whether McKinsey is selling one clients information to another client internally. So far, McKinsey claimed that one department in the firm does not know what other department is doing. However, this so called internal Chinese walls are very difficult to verify.

In 2012, McKinsey long standing former CEO, Mr Rajat Gupta was convicted of Insider Trading in US court. It was revealed that, while acting as board director in multiple companies, Mr Gupta leaked information trading information to his friends. Thus, it clearly proved that the firm’s claim of having their right hand not knowing what their left hand doing is quite unfounded.

Junior consultants in the firm may not have the visibility of what other consultants doing, but at senior level, directors do have inter client project visibility and can easily transmit information. McKinsey can immensely leverage their inter-client knowledge base for strategic advise to other clients in same industry in other geographic sectors (most McKinsey clients are multi-national businesses).

Experts say that Rajat Gupta’s case will definitely dent McKinsey’s claim of secrecy but only time will tell whether it will have any effect in firm’s future reputation or revenue.

Why Social Mobility is important?

Social Mobility is a measure of to what extents someone’s parents’ income/education/status will dictate how much someone can achieve  (income/education/status)  in their adulthood.

Social Mobility = Parent’s income / Their Child’s adult income

For example, when you were young, your dad earned $20,000 per year in his 40 years of age, which is in today’s terms, say $40,000.

You are an adult today and in same country you are earning $80,000 at same age.

So, your social mobility score is = 40000/80000 = 0.5

If the score approaches towards 0, it indicates higher social mobility. On the opposite scale, if it becomes 1 or more than that, it indicates lower social mobility.

All countries should aim for higher social mobility because it signifies that even if you were born in a poor/disadvantaged family, one should still be able to rise at the top. So, technically speaking, if you live in a country with higher social mobility scores, you are more likely to become CEO of a big company even if your parents pushed trolleys in supermarkets in their whole life.

When a child is born to a rich parents, s/he is more likely to get better care, better education etc. This often leads to successful life at adult stage. Social Mobility measures the extent of cumulative advantage.

So, to sum up,

poor parents, rich kids = higher social mobility
poor parents, poor kids = lower social mobility
rich parents, rich kids = lower social mobility
rich parents, poor kids = bad social mobility (shows that situation worsened over time)

Although how much one can rise in life often depends on individual’s capability, government rules can also influence the outcome. For example, if studying in law school requires expensive upfront fee payment, then only rich people’s kids can afford that – which will lead to lower social mobility score. However, if government can ensure fees are less so that any meritorious student can get admission, then  kids from poor family can study and earn good money, which indicates higher social mobility score.

Some example scores:

Denmark    0.15
Austria    0.165
Norway    0.17
Finland    0.182
Canada    0.191
Sweden    0.274
Germany    0.32
Spain    0.32
France    0.41
USA    0.47
Italy    0.48
UK    0.5

This indicates Denmark has a much higher social mobility than United Kingdom.

 

Why big companies often fire and hire people at the same time?

In today’s economy, it is not unusual for big companies to fire and hire people at the same time. More often than not, if happens in very large organizations. They often make a group of employees but surprisingly, hire some other new people at the same time.

Why do the behave like this?

There is no single answer to this behavior. Big businesses often have multiple segments which can sometimes operate independent of one another. If one business unit is losing money, it is quite natural for them to make people redundant. However, at the same time, another business unit may be doing good and thus expanding which requires new recruits.

Companies sometimes try to see if they can find suitable openings for redundant employees in other parts of business but it seldom happens. Either the leaving employees do not have enough skill set to fill new positions or companies do not want this as this can rise in resent among employees who might have been offered lower wage in new roles. It is an ethical question of how far companies should go to help relocate affected employees in other parts of the business. Most of the times, management do care that much to look for proper relocation by necessary trainings. The training will cost companies which they may not want to incur.

Why top bosses in big companies are often non technical?

One cannot build a large business by alone.  A great corporation is result of lots of capable people working together. Thus, people in top levels need good human engineering skill – i.e. being able to communicate, negotiate, influence and lead other people. In fact, research carried out by Carnegie Institute of Technology shows that 85% of someone success in management level, in general, depends on people skills. Only the rest 15% at most sometimes depend on technical skill alone.

There are some exceptions though. Some big businesses were built from scratch by people who were extremely good at their field of work. On those cases, they often had the combination of great technical skill along with people management skill.

Fun: Management pyramid explained

I found this somewhere on the web. Could not resist to reproduce here.

Picture indeed speaks thousands words!