The power of organisation

Large corporations provide lucrative growth opportunities to employees.

RIYADH:

Why your parents have been happy if you got a job in a big company, or they told you to strive for one if you didn’t get there after graduation. Well you probably already have the answer, there is a career path, personality grooming, perception of job security, etc. The punch line, however, is that it offers a lucrative opportunity in the future, even if smaller firms offer the same starting salary. So is this true?

Well it is. The Fortune 500 Global companies or the largest companies in the world by gross revenue generated $26 trillion in sales in 2011 (40% of GDP) and $1.5 trillion in net profits. These are remarkable numbers, but to get a better idea of the value generated by the employees of these firms, we have to take the gross profit number. This is basically the value created by the employees to pay off themselves and other overhead expenses.

With a gross margin of 40% (from S&P 500 index with many overlapping companies), we get a total annual value created by employees of $11.7 trillion. Even if you shave off 30% of this amount for non-wage operating expenses, we get $8 trillion.

With Fortune 500 companies’ base of around 90 million employees, the average employee creates around $88,000 per year in value. Of course, the companies cannot pay all to employees. They have to keep money for returns to shareholders and creditors.

Again taking S&P operating margins at 20% or nearly half of gross margins, we can estimate that employees of Fortune 500 walk away on average with half or $44,000 per year, compared to around $7,000 per year wage income for the world as a whole.

Consequently, the top 500 companies employ 1.3% of the world population, but create value equivalent to 12% of world GDP for themselves and the financiers. Quite incredible when you consider that the global list also includes state entities in relatively poor countries such as India and China, including China Industrial & Development Bank, Indian Oil, etc. There are still another 1,500 or so companies outside this list with market capitalisation of above $5 billion, so the power and contribution of large-scale organisations is apparent.

However, the influence of large companies goes beyond pure value creation. The fact that 40% of annual world output (in terms of revenues) passes through these 500 companies alone, means that they can exercise great influence on people who are both buying and selling to them. That is why many books, particularly relating to social issues, in developing countries deride large corporations as evil, coming to plunder resources and disturbing the local way of life.

While this is probably a harsh way to look at things, it is clear from the value creation numbers that big organisational structures have large interests of employees and financiers to protect and enhance.

The writer works as an economist and portfolio manager

Published in The Express Tribune, 25^th, 2012.