Do salaries really need to rise?

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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.

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