Author Archives: Guyeon Kim

Competition Policy in EU: Gazprom’s Case

Apr 20th 2015

Thesis: EU’s regulations on Gazprom are necessary to keep the competition policy which set fair rules as well as protect EU consumers.

ec

(http://hungarytoday.hu/news_tags/european-commission)

After taking Econ 444, the European Economy, I can understand the structure of EU and its economic policies better. Among various procedures in EU, “Competition Policy” is one of the most important laws, which was made for protecting European consumers from a corporation abusing the monopolistic power. Also, by punishing those illegal activities, European Commission can bring more competitions into the Europe.

gaz

(http://www.forbes.com/sites/kenrapoza/2014/11/04/gazprom-gets-paid-but-overdue-bills-still-due-in-ukraine/)

Wall Street Journal says that European Union’s competition regulator plans to file charges against OAO Gazprom, a Russian gas company owned by the Russian government. “The European Commission started a formal investigation into Gazprom’s business practices in some eastern and southern European countries in 2012, saying that it suspected the company of abusing its dominant position in those countries’ natural-gas supply (Wall Street Journal).” Many people argue that this decision is not reasonable because Gazprom is the biggest only gas supplier for the Europe (32.6% of total oil import and 38.7% of total gas import – Wikipedia), so if the relationship gets hurt, the negative results will affect on the whole Europe. Also, they worry about some tensions between Russia and the Europe not only in terms of economics but also of politics.

However, I think regulations on Gazprom are unavoidable and necessary for the EU. First of all, I agree with the statement that Ms. Vestager, a Danish politician who serves as a Member of Parliament, said. “It’s very important for me to make sure that any company in the European market is being faced with the same set of rules and the same effort of enforcement.” Also, since the European Commission was established, it has dealt with various corporations from a giant multinational company like Chiquita to a small company like German local beers brewer, treating them all equally within laws. So, Gazprom cannot be the exception. If the EU didn’t take an action for Gazprom (it completed investigations and already found some obvious evidence), it cannot keep competition rules and apply them to any other firms.

Second, those competition policies were made to protect the EU consumers and encourage fair competition between firms in the Europe market. If the Commission doesn’t accuse Gazprom of market partitioning, market foreclosure and different oil prices (price differentiation), consumers will be charged unfair costs, basically harming the EU’s economy. Some people contend that Gazprom is the largest outside (natural gas) supplier so that EU should not hurt the relationship with it. However, because of its huge size and influence, the European Commission and Court should be more careful monitoring its activities.

There is a saying that “when in Rome, do as the Romans do.” The European Union always set its rules to companies in the EU market regardless of their nationalities. It should apply the same laws to Gazprom now. Gazprom’s case will influence on future possibilities of violating the competition policy and strengthening the EU rules, because it shows that there will be no exceptions.

Leaving the Eurozone Can Be a Turning Point for Greece

Apr 18th 2015

Thesis: To resolve current bailout issues and the severe economic recession, Greece should consider leaving the Eurozone, adjusting its monetary policy and economic system.

debtgdp

(Google Public Data – Government debt as percent of GDP)

Greece has had a significant economic crisis since 2008. Its debt became more than 120% as percentage of its GDP and even hit the 170% in terms of the ratio. IMF and ECB (European Central Bank) provided bail out programs (and some additional programs) for Greece to help the Greek government exit from the severe recession. However, many people worried that the Greek government might not implement the agreement properly, because it could cause some negative impacts on politics and social benefits. Unfortunately, their worries become true that many creditors express frustrations with the new government in Athens which is resisting further changes to Greece’s pension system and labor market.

The problem is Greece need more funds and its government should negotiate with IMF officials and creditors again. According to Wall Street Journal, “Negotiations over fresh emergency financing for Greece are likely to take several more weeks, even though the cash-needy government in Athens requires a deal to help it meet a big increase in debt payments due in June.” Furthermore, many economists and European officials concern that the delay in bailout can cause a default on Greece’s obligation. Already, FTSE 100 (The Financial Times Stock Exchange) closed down 66 points (0.93%) on Apr 17th because of continued concerns over a possible Greek default (BBC).

ftse

(http://finance.yahoo.com/echarts?s=%5EFTSE+Interactive#symbol=%5EFTSE;range=1d)

It is possible that Greece exits from the monetary union (Eurozone) if its government announced default. Although many people argue that this is not the best scenario, I think it could be a turning point for the Greek economy, having enough time to fix its fundamental problems in the system and adjust monetary and financial policies with its own currency.

There could be some advantages when Greece exits the Euro zone. First of all, the Greek government can issue its own Greek currency (could be Drachma, the previous one) which means it can control over the amount of money in the Greek economy. Usually, governments print more money (or purchase bonds to release funds) to boost the economy and Greece also can do that. It is impossible when Greece belongs to the Eurozone because the monetary union cannot implement economic policy for one member’s situation; it is one of the biggest disadvantages of joining the Eurozone.

Also, because of a lot of debt and its harsh economic situation, Greek currency’s value is going to be really low, triggering more exports and encouraging more tourists into the country. Greek bonds will be more appealing to many investors who anticipate that Greece will escape from the crisis so that its bonds’ prices will increase a lot. In addition, Greece needs to fix its weak economy, compared to other members in Eurozone. I think it should focus on its traditional and main industries such as tourism, shipping, textiles and food. Also, the government should consider what industries it encourages and what industries it discourages (or abandons), anticipating the future when it rejoins the Eurozone.

Although many Greeks worry about its exit from Eurozone which has been a safe guard for Greece for years, actually leaving the union is not a bad idea for Greece. It can be a turning point for Greece which offers a chance to fix problems in Greek economy and improve the whole situation in Greece.

Unavoidable Reduction in Benefits of Social Security

Apr 15th 2015

Thesis: Government should reduce benefits of Social Security to make the Social Security fund sustainable.

Social Security is a controversial topic because it is related to numerous fields such as economics, social studies and politics. Wall Street Journal conveys an argument of Chris Christie, a New Jersey governor, saying that the government should raise the age for the social security and cut benefits for some seniors. Within in the frame of Economics, I agree with his general idea that the government should reduce Social Security benefits because the fund is not sustainable.

First of all, Social Security faces with a serious problem that its cash expenses exceed its cash receipts. According to Pew Research Center, since 2010 Social Security has had negative cash flow. “While credited interest is still more than enough to cover the deficit, that will only be true until 2020 (Pew Research Center).” The “interest” is why some people believe that still Social Security is running surplus. However, it is obvious that the interest’s coverage will be run out soon (the research argues that it will be terminated in 2020) because cash outflows already overwhelm inflows. Although the government faces with using the accumulation of Social Security fund, it cannot stop providing Social Security all at once. That’s why the government should reduce its benefits and restrict some recipients.

ssr

(http://www.pewresearch.org/fact-tank/2013/10/16/5-facts-about-social-security/)

Furthermore, the graph above shows that if the government keeps the same benefits and cash flows, Social Security’s reserves will be fully depleted by 2033 (the trustee’s report). After 2033, the system will receive some tax revenues, but it will only be enough to pay about 3/4 of promised benefits, generating a lot of deficits. So, reduction in Social Security benefits is unavoidable or our future generations will have more severe burdens.

Some people say that the government should keep Social Security or even expand it; however, economically it is not possible. Although those predictions (especially 2020 and 2033) are not exactly correct because of unknown variables and uncertainties, the fact that the government should reform the Social Security system doesn’t change.

As Chris Christie mentions in Wall Street Journal, gradual increase in the retirement age (already in the process of reaching 67 years in 2026) to 70 can be a reasonable alternative to reduce some benefits of Social Security. Abolishing Social Security is one of the solutions, but if the government wants to keep the program (since many people think that Social Security is one of the most successful policies in the U.S.), reduction in its spending will be inevitable at any point. If Social Security reforms don’t happen now, future generations will have more severe problems of sustaining the program.

Revised Post 5: POSCO Needs Reformation

Apr 13th 2015

Thesis: POSCO should reform its structure to reduce the government’s influence and become more competitive.

posco

(http://en.wikipedia.org/wiki/POSCO#/media/File:POSCO_logo.svg)

POSCO is number one steel producing company headquartered in Pohang, South Korea. In 2010, it was the world’s largest steel manufacturing company by market value and named as the 146th world largest corporations by the Fortune global 500 in 2012 (Wikipedia). However, in between last April to June, Berkshire Hathaway which is known for its investor and the chairman, Warren Buffett, sold all POSCO stocks it held since 2007. Many people consider that Berkshire Hathaway’s decision is a signal that POSCO is not valuable to invest anymore. Also, POSCO’s consistent decrease in stock price makes investors worry. The below picture is the trend of 1year of POSCO’s stock price, showing that after September 2014 its value keeps going down.

posco_1

It seems obvious that general steel production market situation is bad and may not be recovered for a long time. I agree with the perspective that global steel market has a recession and China supports its own steel production, so POSCO becomes less attractive. “Steel producers around the world, including South Korea’s Posco, have faced challenges in recent years from a glut of the building material used in everything from skyscrapers to bridges, as China ramped up production (Wall Street Journal).”

posarce

baonippon

However, POSCO’s situation is more severe. I searched 5 year stock prices of steel producers including Nippon (Japan), Baosteel (China), ArcelorMittal (Luxemburg), and POSCO (they are all in ranking 10 steel productions– source from Wikipedia). Although Arcelormittal, which is the number one in the world, has some decreases in stock price since 2014, it is not as much as severe the POSCO’s stock price. And other competitors’ don’t seem have much problems in their managements and expectations from investors.

I think the fundamental problem of POSCO is distinguished from the general market condition. First, POSCO doesn’t have an owner since the Korean government (which was the owner of the firm until 1996) pursued “possession diversification,” restricting the amount of shares that individual or other investors could hold. The Korean government believes possession diversification can make POSCO more efficiently without having a risk that a foreign firm could own POSCO. Although it makes sense in theory, people realize that CEO doesn’t really care about the long-term goal of the firm and he or she doesn’t eager to advance the structure in POSCO.

Furthermore, although the CEO is decided by POSCO’s executive board, the government indirectly influences on the position. It is another problem in POSCO that the “Korean government” chooses a candidate who can be a CEO of POSCO although it doesn’t have any shares. It is not an obvious activity, but all CEOs in POSCO resign after the government alters. Finally, most CEOs become favor of the current government and it causes the chairman less careful of the firm’s prospect and fundamental reforms (Sisainlive.com). More specifically, the prosecution investigates POSCO and its partners, making the CEO resign. It already happened in 2014 and many Koreans doubt that Berkshire Hathaway might sell all stocks because it didn’t understand the structure.

Overall, POSCO faces with numerous problems such as decrease in demand, a strong competitor, weak structure and the governmental intervention. Although the current CEO, Oh Jun Kwon, argues he will reform POSCO more profitable and sustainable, it is unclear that POSCO can get rid of corruptions and a vicious cycle in its structure. I think, above all, POSCO should disconnect its relationship with the government because its intervention hurts the nature of competition as well as the trust. Governmental impact makes the company keep wrong decisions (only pursuing short-term benefits and expand the infrastructure too much to boost the economy – used as a policy tool), causing investors take off their money from the company. I hope to see the original best steel-making company in Korea again and the first step must be the disconnection to the government.

Cartels, Gold and the Mexican Government

Apr 11th 2015

Thesis: Mexico should resolve the criminal activities by cartels; otherwise it will lose global investments as well as several industries.

gold

(http://www.digitallydanielle.com/use-multi-channel-funnels-reports-google-analytics/)

Mexico is famous for its food, culture (Aztec, Maya, and Toltec civilization) and gangs. Although I’ve heard many times from my friends that they want to travel Mexico, it never has happened because they are worried about the safety problems. It is obvious that Mexico loses a lot of tourists and their money until they guarantee foreigners’ (and Mexican citizens’) securities. However, this is not the end of the problem that Mexico faces. Unfortunately, there is one more bad news for the Mexican government that McEwen Mining Inc. is robbed by criminal gangs 7,000 ounces of gold. According to Wall Street Journal, “…global headlines and highlighted worries about the safety of miners in Mexico, one of the world’s largest mining centers.”

SNL Financial says, Mexico is the world’s biggest silver producer and a major producer of gold, copper and lead and it has increased its share of mining companies’ global exploration dollars, from 4.6% in 2005 to 6.6% in 2014 (Wall Street Journal). However, security problems are big issues in Mexico. For example, in 2013, an executive at steel and mining giant ArcelorMittal was shot in Lázaro Cárdenas, in a killing that former and current Mexican intelligence officials believe was the work of a local and powerful drug cartel. And cartel activity with violence and criminality has expanded to all over in Mexico.

The Mexican government should solve the problem as soon as possible because the insecurity problem in mining companies and their employees proves the recognition that Mexico is dangerous to work in or invest in. It actually prevents many individuals and firms to invest more in Mexico. Investors think that Mexico is too risky to put their money into because of its notorious image of cartels, drugs and crimes and it is true that various cartels have a lot of influence on the whole Mexico (see the below image). Those cartels negatively affect on the Mexican economy by taking profits from illegal activities (such as drugs, weapons and prostitution) and destroying the rules in the market. Who does want to invest in an insecure and unstable country? Clearly, Mexico actually loses a lot of global investments because of cartel problems.

mexico_cartel

(https://www.stratfor.com/image/areas-cartel-influence-mexico-2013)

Furthermore, the mining companies in Mexico try to ship their minerals out in armed vehicles on random days to avoid attacks from cartels (Wall Street Journal). However, it is obvious that advanced security can cause more costs for companies, so they might consider other regions which also have plenty of minerals without worrying crimes and criminals. If those robberies become more severe, global companies such as McEwen, Goldcorp and Torex Gold Resources will leave the country.

Cartels have been a serious issue in Mexico because they have dealt with all illegal activities and even have influenced on the policies and governments. It is challenging to get rid of their impacts, but if the Mexican government fails to resolve the problem, many people will wonder the ability of control and administration of the Mexican government. Also, people will assume that Mexico is an attractive place to invest or cooperate with. It is apparent that Mexico should follow the world standards (or rules) if it wanted to play in the global setting.

The Advanced Bitcoin Market

Apr 8th 2015

Thesis: With new technology and investments, the bitcoin market will expand soon, replacing major part of the current monetary system.

bit_invest

(http://www.wsj.com/articles/big-investor-involvement-could-boost-bitcoin-1428259814)

I first heard about the concept of bitcoin when I took the money and banking class, comparing the current money system and a possible alternative, bitcoin. Wikipedia defines Bitcoin a payment system invented by Satoshi Nakamoto, which can be transacted directly to sellers by consumers without a central repository or single administrator like the US Treasury. One of the earlier blog posts I wrote is about some advantages of bitcoin and its prospect as a future currency system. However, many people doubt about its realization, pointing out that the new system may not secure and could be hardly accepted by the public already used to the existing structure.

Wall Street Journal, however, contends that bitcoin can be more prospective because some of the U.S.’s proprietary traders and investors are interested in that. Their attentions provide a potential boost to the virtual-currency industry. “They see potential for big profits in trading bitcoin as more investors enter the market and financial-services firms use the currency to streamline transactions (Wall Street Journal).” The involvement is significant for bitcoin because it can also help reduce volatility in the bitcoin market, one of the main problems it has.

Although bitcoin is attractive for many investors who are seeking higher interests (in other words, who believe that bitcoin market will expand), there are numerous challenges that the bitcoin market should overcome to attract more investors and participants. Security is one of the biggest barriers preventing people to invest in or involve in bitcoin. However, according to Wall Street Journal, Noble (New York based startup) provides its platform which will use Nasdaq’s X-stream trading system, a high-tech system for matching market participants’ orders that is used by more than 30 exchanges and marketplaces worldwide. The agreement will pave the way for many firms to hold and trade digital currencies because bitcoin can make the financial system more efficient (more details in my blog post), eliminating transaction fees. Also, “Noble Chief Executive John Betts said he believes Nasdaq’s involvement will help dispel investors’ concerns about the risks of trading in digital currencies (Wall Street Journal).”

With introduction of new technology, bitcoin becomes more attractive to investors who eventually drag more and more actors in the market. It is a synergy effect that investments and actors make in the bitcoin market. But, the market still needs more actors including investors, traders and participants who are hesitating to be involved in bitcoin. In other words, bitcoin should mitigate concerns related to its abuse in illegal activity and volatility. However, I think bitcoin will soon substitute major parts of the current monetary system. Already, investors and firms with technology prove its potential.

POSCO: with Government, without Owner

Apr 6th 2015

Thesis: POSCO should reform its structure to reduce the government’s influence and get more investments.

posco

(http://en.wikipedia.org/wiki/POSCO#/media/File:POSCO_logo.svg)

POSCO is number one steel producing company headquartered in Pohang, South Korea. In 2010, it was the world’s largest steel manufacturing company by market value and named as the 146th world largest corporations by the Fortune global 500 in 2012 (Wikipedia). However, in between last April to June, Berkshire Hathaway which is known for its investor and the chairman, Warren Buffett, sold all POSCO stocks it held since 2007. Berkshire Hathaway earns about $592,500,000 because it bought POSCO shares (about 4.5%) when they were around $150 per share and sold them all when they were around $300 per share.

Since Warren Buffett is famous for his long-term investment strategy, many people argue that general steel production market situation is bad and may not be recovered for a long time. I agree with the perspective because global steel market has a recession and China increases its steel production, making POSCO less attractive. “Steel producers around the world, including South Korea’s Posco, have faced challenges in recent years from a glut of the building material used in everything from skyscrapers to bridges, as China ramped up production (Wall Street Journal).”

However, I think the fundamental problem of POSCO is distinguished from the general market condition and this is the actual reason which causes POSCO less attractive to investors. First, POSCO doesn’t have an owner since the Korean government (which was the owner of the firm until 1996) pursued “possession diversification,” restricting the amount of shares that individual or other investors could hold. The Korean government believes that real owners of the company, investors, can choose the CEO so that POSCO can be run efficiently. Although it makes sense in theory, people realize that CEO doesn’t really care about the long-term goal of the firm and he or she doesn’t eager to advance the structure in POSCO. Another problem is government’s influence on POSCO. The firm has “outside experts” in the executive board to monitor the inside of POSCO and CEO but, the problem is “Korean government” chooses a person who can be a CEO of POSCO although it doesn’t have any shares. Therefore, CEO of POSCO changes when the government alters, causing the chairman less careful of the firm’s prospect and fundamental reforms (Sisainlive.com).

Overall, POSCO faces with numerous problems such as decrease in demand, a strong competitor, weak structure and the governmental intervention. Although the current CEO, Oh Jun Kwon, argues he will reform POSCO more profitable and sustainable, it is unclear that POSCO can get rid of corruptions and a vicious cycle in its structure. I think, above all, POSCO should disconnect its relationship with the government because its intervention hurts the nature of competition as well as the trust. Governmental impact makes the company keep wrong decisions (only pursuing short-term benefits and expand the infrastructure too much), causing investors take off their money from the company. I hope to see the original best steel-making company in Korea again.

Supply Problem in Organic Products Market

Apr 4th 2015

Thesis: Organic products should be produced by more structured and organized big farms.

After taking the Biology class (Food, Energy and Environment) last year, I became more aware of environmental issues and changed my life style. One of the main changes in my life is the way of choosing food. I had thought organic products were just expensive because of “brand value,” but after I learned what could be organic food, I preferred organic products to cheap manufactured food. Because I am not the only consumer who changes the preference (many people join in the consuming organic products), the organic market now becomes one of the hottest categories in the U.S. food industry. Wall Street Journal mentions about the organic products’ supply chain problem in the article “Hunger for Organic Foods Stretches Supply Chain,” illustrating that the growth rate of demand overwhelms that of supply.

Because of fast-growing demand, organic products corporations try to finance farmers, offer technologies and even buy some farms. “The efforts are aimed at ramping up organic-food output that has failed to keep pace with surging consumer demand, due in part to the significant costs and risks that U.S. farmers face in converting from conventional to organic farming (WSJ).” For example, the supply of organic soybeans is so small that many U.S. food makes should import soybeans from overseas, causing the increase of costs and problems in monitoring quality. As CEO of Hain Celestial Group, Irwin Simon says, although you have great brands and goods, you are going to be in trouble without enough supply.

Many environmentalists are against the idea of giant organic farms because small farms are killed by the more efficient way of manufacturing process. Also, they blame those big companies don’t have the “organic” mission but only seek for profits. However, I think a well-structured big corporation only can be a solution to satisfy the supply problem without lowering the quality. First of all, “organic” cannot be labeled on any products. “Organic food is label-certified by an independent third-party organization and regulated by the U.S. government (WSJ).” The label guarantees that agricultural products and livestock are grown and raised by meeting certain standards which strictly restrict synthetic pesticides, hormones, antibiotics and genetically modified seeds. Keeping all standards is difficult for many small farms because it requires lots of cost. However, big farms can handle this cost much easier because “economics of scale” can be applied.

Furthermore, the U.S. government can regulate well-organized corporations much easier. For example, when the government modifies some rules, it can easily monitor big companies to check that whether they apply new rules or not. So, the government can advance standards faster, easier and more efficient with big farms. If there are only lots of small farms, it will be much harder to observe and regulate them. It is obvious that watching a lot of small farms is more costly than keeping eye on several big farms.

Although some people argue that the market needs some time and eventually small farms can supply enough products, waiting can be too expensive. In other words, it is true that small farmers can supply the organic market demand if they have enough time, but the price of organic products will go up so high. Still, many people think that organic products are luxurious (about 2-3 times more expensive than manufactured food). If the supply cannot fulfill the demand, prices will increase and many consumers will not choose organic products and it can be related to the overall decrease of the organic market.

Therefore, I believe big farms can be a good suggestion to solve the lack of supply problem. They are well organized and easy to be regulated by government so that consumers can believe the quality. Also, the supply of organic products can be stable with large corporations which can alleviate the high price as well.

AIIB I: Positive Impacts of AIIB

Apr 1st 2015

Thesis: AIIB will positively influence on the third world by supporting funds and technology and the world economy by becoming a rival of IMF and World Bank.

aiib

(http://www.thefinancialexpress-bd.com/2015/03/26/86514)

The AIIB (Asian Infrastructure Investment Bank) expands its memberships from European countries to Asian countries despite the U.S. government’s strong objection. Last Tuesday was the deadline for signing up as founding members and numerous countries such as the United Kingdom, France, Germany, South Korea and Australia joined the AIIB. Robert Zoellick, former president of the World Bank, says that the establishment of AIIB means the failure of Obama administration both on policy and on execution (Wall Street Journal). First, the U.S. government concerned about Chinese ambition to remake the world’s multilateral landscape by reducing the impact of the World Bank and tried to convince allies not to join in. However, I agree with Zoellick’s idea that the U.S. should realize the existence of the AIIB and try to become a friend. “If I had been at the World Bank, I would have tried to embrace the AIIB as a partner (Zoellick).” Also, on execution, he pointed out that the administration only pressured its allies and partners, but didn’t provide an alternative. For example, for South Korea, the AIIB is really attractive because China, the founder of the AIIB, can support South Korea in some issues related to North Korea and expand the its influence to the world. Since the U.S. didn’t succeed in convincing the Korean government with specific alternatives, there was no choice for the Korean government and for other countries as well.

Personally, I support the establishment of AIIB because I think it will influence positively on the third world’s economy as well as on the world. More specifically, it is true that there are many developing countries in the Asia which need funds for building infrastructures. IMF (International Monetary Fund) and ADB (Asian Development Bank) were the only sources that those governments can borrow some funds; however, both institutions are led by Western countries which usually do not get though the economic growth and do not comprehend the Asian culture. I think AIIB led by China and other Asian countries will offer better options for developing countries since most members already got through the growth period. Also, it is possible that members in AIIB can provide technologies as well as their past experience and strategies.

Although the U.S. concerns about the transparency problem in AIIB, European countries like France, Germany and England and South Korea form the East Asia will control the structure. And I think the U.S. also can be another supervisor as Zoellick argues, “we should press the Chinese to perform to institute those institutions in ways that would be supportive of international economic growth.”

Finally, it is time to change the U.S. government’s recognition of AIIB. The institution is already organized successfully and many countries are positive to its impact. I think AIIB will boost the economy in Asia by providing funds with lower interest rate (I agree with the statement that AIIB lowers the interest rate of IMF, ADB and AIIB itself because of competition) and will balance the world financial market which was led by the U.S.

Revised Post 4: How to Keep Employees

Mar 30th 2015

Thesis: To reduce turnover, companies should understand “organizational equilibrium” theory with a new method – recognition, not compensation – improving their management system.

gb

(http://customerthink.com/is-contact-center-turnover-cause-for-celebration/)

As a job seeker, I feel nervous that I can be rejected by firms because getting a job becomes harder and harder. However, employees who already passed this step and got jobs sometimes leave their firms with various reasons. Voluntary turnover (exclude involuntary turnover such as illness, death and downsizing) becomes a big worry for companies, causing them lots of expenses. According to Wall Street Journal, the median cost of turnover for most jobs is about 21% of an employee’s annual salary (Center for American Progress, a liberal-leaning think tank). And it can cost, on average, $3,341 to hire a new employee, according to the Society for Human Resource Management. “A one-point reduction in unwanted attrition rates saves the bank $75 million to $100 million a year. (Wall Street Journal)” Basically, companies should retain existing employees to avoid those costs.

Wal-Mart Stores Inc., Credit Suisse Group AG and Box Inc. are analyzing data to determine who is likely to leave a firm, for giving some warnings to their managers before employees leave (Wall Street Journal). Some researches argue that employees who were spending less time interacting with certain colleagues or attending events beyond required meetings are more likely to quit. General conclusion is, however, there is no single factor which significantly matters, rather combined variables influence on employees’ decisions. More importantly, companies now face with the question that what they should do with this information to decline the number of turnover.

Some people insist that better compensation should work. Another Wall Street Journal article agrees with the statement, describing companies should provide competitive benefits for employees. It is a good solution to retain employees, however, what about small companies which do not have sufficient funds? I think for companies which doesn’t have enough funds, a theory called “organizational equilibrium,” has great suggestions. It illustrates that an individual stays with an organization until the benefits it offers (such as payments, working conditions, and other opportunities) are equal to the contributions (time or efforts) one makes. In that sense, I think the best way for companies is being careful when they manage employees except offering better compensations. In other words, employers and managers should be more respectful for their employees and recognize their achievements to retain them with less compensation. Mayhew says, “Recognition is a low-cost solution to showing appreciation for the work employees do and their commitment to the company” in his article “High Turnover Because of No Recognition.” The picture below also describes the importance of the recognition. It is from the book “The Carrot Principle,” emphasizing that the best managers use recognition to engage employees, boost retention, and acceleration performance.

pyramid

(http://www.business-strategy-innovation.com/2009/06/book-review-carrot-principle.html)

Furthermore, I believe keeping eye on alternatives that employees have is important. If we assume that most employees are rational, it is obvious that they will compare various options. If one person puts $50,000 value of efforts and gets paid $50,000, he or she will move to another company which offers more than $50,000. On the other hand, although the compensation is not satisfactory to employees, it is possible that they stay at firms if there is no other option. Also, if the general economic situation is bad (for example, 2008 subprime mortgage crisis or industry downsizing), companies can persuade employees

Turnover is costly for both companies and employees. Two different actors need to adjust themselves with the changed environment, so the actual amount of cost is much higher than the number of the theory. In other words, it is much easier for companies retain their employees than they expect if they have an advanced management system (well-recognizing system) as well as cohesive community culture. Familiar tasks and friendly colleagues can have stronger power to make employees stay than money has.