Slippage and Risk Ratio recalculations

To the Editor: I read with interest the benchmarks of this year's Big50 class ("Big50 By the Numbers," May 2003). Imagine my disappointment to find that slippage among this august group is all above 3.8%. In my seminars, I suggest that slippage over 2.5% is grounds for a witch-hunt. It indicates a lack of markup/margin knowledge, a terrible estimator, poor production controls, poor client or job selection, or a portion of all of the above.

Further, the risk ratios you show make no sense to me, and I cannot mathematically figure how you got those numbers. They don't correlate to the average income and revenue from the accompanying charts. They're interesting figures nonetheless and show that the larger companies are not rewarding their CEOs anywhere near enough for the additional stress and responsibility of keeping a large ship afloat.

Alan Hanbury Jr., CGR, CAPS

House of Hanbury Builders, Newington, Conn.

Hanbury makes a number of interesting points. Let's look at them one by one, beginning with slippage. One factor affecting the numbers reported in the May issue was incomplete results. Since press time for the May issue, we've received additional data that change the slippage picture somewhat. Also, some of the data include "outliers" -- values that are much higher or lower than the other results -- which can skew averages.

Here is the chart again (top chart, below). It incorporates the new data and provides a median value to eliminate the effect of the outliers. (The median is the number in the middle of a given set of numbers.) The $1 million to $3 million grouping is also new, combining companies that were reported on separately in May but whose numbers are close enough to be looked at together.

The good news is that the median for all companies is -2.9%, meaning about half the companies performed better than Hanbury's "witch-hunt" standard. The bad news is that just over half performed worse and need to take a hard look at where their profit leaks are.

The risk ratio is arrived at by dividing total revenue by total owner compensation (see December 2002; January 2003; and February 2003, for detailed discussions). The risk ratios presented in the May 2003 article are averages of all the risk ratios of all the companies that supplied data. They are not determined by dividing average revenue by average compensation.

Because of the presence of new data, however, and to eliminate all effects of outliers, here are the risk ratio values again, including a median (bottom chart, below). Recalling the benchmark for owner compensation of 10% (March 1999, page 184), the target risk ratio is 10. Anything lower is better, which means that quite a few of the smallest Big50 company owners are compensating themselves quite well. But, again, Hanbury is correct when he points out that, overall, owners don't pay themselves enough.

Big50 Slippage Recalculation

A risk ratio higher than 10 indicates that company owners aren't paid enough for the risks they take.

Big50 Risk Ratio Recalculation