Morgan Stanley seems to be paying more than it can afford

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Morgan Stanley's Q2 results, released today, suggest it's being a little too lavish with its employees.

Compensation per head in the second quarter rose to $86k, up from $67k this time last year and in Q1.

As a percentage of net revenues, compensation rose from 43% in Q208 to 71% in Q209. Admittedly, this was partly attributable to $2.3bn charge related to an improvement in the firm's own debt, but compensation would have risen to 54% of revenues even if this charge were absent.

The increase comes after the bank announced plans to increase salaries for managing directors to around $400k. Headhunters say John Mack's salary hikes are generous compared to most other banks.

It's not the first time that Morgan Stanley has devoted a large proportion of its revenues to paying its staff after things went awry. In 2007 it bumped up the compensation ratio to 59%.

It may be that MS has no choice but to spend more than it ought to on compensation. A few months ago Mack complained about poaching by rival firms and shortly after that various Morgan Stanley bankers resigned.

Headcount appears to have shrunk during the quarter. After the addition of 20,004 people from Smith Barney, headcount was down 1,448 on Q1.