High salaries, low hiring, high firing

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High salaries are all very well, but logic suggests they’re likely to a) discourage recruitment, and b) encourage redundancies.

To recap: UBS, BofA/Merrill Lynch, Morgan Stanley, and Citigroup have all increased salaries by as much as 100%; JPMorgan says it’s thinking about doing the same.

By increasing salaries banks are whacking up fixed costs. This is not a good idea in an industry where revenues have been known to fluctuate substantially year on year.

If bonuses fall as a proportion of compensation, there will be less cost flexibility next time revenues dive. At Goldman Sachs, for example, bonuses accounted for 80% of compensation costs in 2007 and 58% in 2008.

Under this arrangement, revenues can (theoretically) plummet 58-80% before job cuts become necessary to maintain compensation at 50% of revenues.

However, if bonuses fall to just 33% of total compensation, as suggested under TARP rules, job cuts will be necessary to maintain compensation ratios whenever revenues fluctutate by a similar amount.

In reality, job cuts are likely to come a lot sooner: bonuses will never fall to zero; arguably at least a third of the bonus pool should be treated as a fixed cost.

HR types acknowledge the danger of quicker, higher redundancies.

However, they say higher salaries are unlikely to discourage hiring because bonuses have traditionally been treated as a fixed cost anyway for the sake of recruitment: “Whenever you sign off a hire, there’s always a budget for total compensation, taking into account the expected bonus,” says one. "We never look at salary alone."