Last year the property agent Savills shelled out £100m in staff bonuses which, considering there are only 3,500 of them was handsome to the tune of about £28,500 per employee. Nice!
But I don’t mention this just to get you seething about overpaid estate agents; I mention it because despite this largesse Savills reported a pre-tax profit of £84m and earnings per share of 44p. The share price of Savills today is about £3, so consider this: had it not paid out those bonuses, its earnings per share would have been more like 100p and the shares in one of the world’s best property agencies would be trading on a PE ratio of just three!
But that is not really my point either. Because we know that Savills’ staff expect bonuses in the good times and will take themselves elsewhere if they do not receive them. So my real point is this: if you are a shareholder in a property agent you actually suffer in good years because a large amount of the bunce goes to the staff. But when times get tough your interests are protected. Suddenly hanging onto their job becomes more important to the property agents than any thoughts of fat bonuses and holidays in Antigua. So for shareholders the bonus system acts as a great shock absorber – not that you would know it if you looked at the recent performance of Savills’ shares.
This mechanism is not peculiar to property agents. Just about every firm in the City operates on the same basis. These are ‘people’ businesses. Staff costs are the main item in the annual expenses column and as anyone in business knows it is much easier to cut staff costs than to close factories or cut costs of another nature. This is why City firms always seem to survive. However dry becomes the stream of City fees. However low goes the market. However depressed and miserable become the leaders of the noble enterprises of the financial services industry they always manage to survive and see it through to the next bull market extravaganza.
People business : here’s an example
Take Aukett Fitzroy Robinson, an AIM-quoted architect’s practice. Chief executive Nicholas Thompson has revived this firm from the mess that it was in three years ago, but is now puzzled to see the share price down at 10p from its 2007 high of 18p. This certainly has nothing to do with the results for the year to September 2007. Earnings per share were 1.06p. The dividend was restored. And better cash management saw Aukett close the year with net cash of £1.7m. The pre-tax profit of £2.3m beat forecasts, and compared to £0.7m in 2005/6. But the really impressive thing was this. The 2005/6 profit was struck after paying staff bonuses of £40,000.
Last year’s profit was struck after staff bonuses of £900,000. So the real profitability of the business has improved far beyond that shown by the headline profits. And this also means that there is a £900,000 cushion of discretionary costs that need not be repeated this year should conditions turn tough.
As it happens though, there is no sign that things will turn tough. Although Thompson admits that there are fewer new development projects in central London, he expects the slack to be taken up by Eastern Europe, where Aukett has a strong position in Russia, and by Aukett’s return to the booming construction region of the Middle East.
So it is by no means all bad news for professionals working in the property and related sectors. In fact thanks to Aukett’s reputation overseas Thompson told me that this is the first downturn in which he does not foresee any need to shed staff. With broker JM Finn forecasting a pre-tax profit of £3.1m on turnover of £22m this year, Aukett’s £15m market value is nothing if not ungenerous.
Amongst the many companies that could be cutting staff bonuses in favour of shareholders, this is one small company that looks well able to sail through choppy waters in 2008.
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