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Do salaries really need to rise?

Not exactly surprisingly, the Wall Street Journal confirms today that TARP-inflicted banks are getting ready to increase salaries.

As we pointed out long, long ago, such behaviour became inevitable the moment the US government imposed restrictions on banks receiving TARP money that limited bonuses for the top five executives and top 20 highest earners to no more than one third of total comp.

The Journal says Citigroup and Morgan Stanley are contemplating raising salaries above the $200k self-imposed ceiling currently favoured by most banks. UBS is said to have upped salaries to $300k already.

But does base pay really need to rise to compensate for lower bonuses? As many of you pointed out in a recent debate, living on a salary alone in London isn’t particularly easy. But it may be necessary.

One interesting study shows that banking pay has been disproportionately high compared to other sectors ever since the 1980s. Based on its normalization, our own calculations suggest that 68k might be the average for financial services employees in future.

Yves Smith at Naked Capitalism isn’t recommending quite so large a drop, but says the current $200k salary ceiling is perfectly reasonable –

Readers can correct me, but my recollection is that salaries for mid and senior level people in the mid-late 1980s were in the $100,000 to $125,000 range. Compound that forward by 3% inflation, you get around $200,000. And while bonuses were bigger than base comp in a lot of areas in most years, they were nowhere near as large as in recent years. And back then, everyone accepted that bonuses were heavily dependent on overall firm results.

Comments (16)

  1. My you are naive Sarah if you believe inflation has been an average of 3% since the mid 80s. Falling real wages has been a fact of Western life since the sixties, now the masters of the universe can no longer avoid joining the rest of the workforce as much as endlessly leveraging up delayed the inevitable.

  2. Back then IBs were smaller too, so that a senior trader can have more impact on the firm’s P&L. We did not have so many mega commercial/investment banks aka Citi.

  3. Yes they bloody well do. I’m 24 and on a 56k basic salary – my bonus gets paid in deferred junk assets. THIS SUCKS!!!!!


  5. 56k for a 24 year old is very well paid already. Unfortunately Bankers have got used to a “lottery-winners” mentaility when it comes to salaries. That is why salaries have to rise as bonuses fall. This will mean that mediocre bankers will receive large salaries irrespective of performance. If the bank can’t afford to pay you what you deludedly think you are worth, resign. If the world gets back to the days when people viewed their career over their lives and salaries and spending were adjusted accordingly, then we may avoid a recurrence of the current mess. It has never been just about talent. Power and greed have played a larger part.

  6. @Realist – why do you think 56k is a good salary – this job is one of the hardest to get out of university so it should be (one of) the best paid – trying buying a house in London (which needs to be close to work due to the hours you will work) for 250k (5 x salary – which is near impossible to get)……so either house prices in London fall another 40% or total comp must reach some middle group (between old base + bonus, and the current just base)…..

  7. Salaries are a fixed cost that needs to be lowered, not raised.

    Since Investment Bankers borrowed from the next 30 years to fund yesterday’s expenses, all costs have to be reduced for the next 30 years to get back on the inflation curve.

    The best compensation scheme is to have base salaries at the minimum level of subsistence and have bonuses that vary based on the companies’ revenues. That practically lowers the fixed costs and provides a better and flexible approach to sustaining full-employment.

    UBS will realise their mistake sooner or later. Global deflation will arrive soon, inevitably – unless governments start printing plenty of money to disguise it.

    The society today is relying too much on borrowing future funds to live in the present.

    Global_Citizen Reply
  8. @Angry — sounds like you should leave banking. It was the ‘hardest job to get into out of uni’ apparently and now they aren’t paying you enough. And for some reason no 24 year old can rent accomodation. Maybe try becoming a doctor or fireman and see what a hard job is.

    RealisticBanker Reply
  9. “this job is one of the hardest to get out of university so it should be (one of) the best paid…”

    Do you know why it is the hardest to get? Because demand is huge. Do you think once you get the job, the work itself is particularly demanding? No. Alan you have a classic case of unwarranted entitlement. you think you are special, because the bank’s marketing dept made you fell that way. get over yourself.

  10. Angry, Alan,
    56k for an analyst of 24 y/o who does nothing but learn from others what to do sounds quite enough. Right that you cannot afford a house in Picadilly, but who can!
    Get some modesty dudes, and do some travel around to see how lucky you are.

  11. Daniel San – i’ve travelled the world (thanks to my bonuses over the years…) and yet i’ve never met anyone who lives in Picadilly?! come back to this site when you don’t live so far up north (i’m guessing some “lovely” place such as Huddersfield or Hull)…

  12. What do you work as to earn 56k basic + bonus? It will be interesting to know as I am making my career choice. Thnx

  13. The trouble with the city is not the young bucks coming through who think they are worth 56K+, if someone is paying them that then they are. The trouble is the rest of the world that doesn’t pay its talent enough. I have the misfortune to work in a country (CH) where the average earnings are about 25K pa and all the wealth sits in the hands of the owners/shareholders. The average citizen doesn’t have a lot of money but does have a job at least.

    The city institutions paying for their talent are right and the rest of the countries businesses need to consider sharing the wealth. I’d be interested to know how much – as a %age of revenue – “Hated City Bank” pays its talent vs, say “Crap Manufacturing Company”. I suspect city workers are the ones (more) fairly rewarded and the rest of the UK is jealous.

    The best example I can think of is Virgin. Sir Richard ha a private jet and island etc etc whilst the rest of the employees make industry average salaries (or at least ‘not city salaries’). How is that fairer compared to RBS/Citibank or Merrills? Rupert Murdoch is another example, SerAlun another etc etc

  14. @gharandoyle – those examples you give – they own the companies – not work for them – so your analysis is meaningless…MUPPET

  15. @me init –

    read his words again. Carefully. Then re-read. Carefully. If you still don’t get it…then….resign your current job before you get fired.

  16. @kelsey – thansk for the advice…

    “Sir Richard ha a private jet and island etc etc whilst the rest of the employees make industry average salaries (or at least ‘not city salaries’). ”

    “whilst the rest of the employees” – he isnt an employee he’s the owner….different base case

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