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High salaries, low hiring, high firing

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."

Comments (4)

  1. “UBS, BofA/Merrill Lynch, Morgan Stanley, and Citigroup have all increased salaries by as much as 100%”

    It means hard times fro recruiters, now that the bonus is included in the base salary, how are you going to move those people to another firm?

  2. I would take huge issue with the assertion that the stated banks have all increased salaries by as much a 100%..possibly for the few..not for the many
    As to moving people..Total Comp is the norm for such moves , a move would normally involve a theoretical/ matchingl movement of stock held to/by a new employer anyway…
    Recruiters commission has normally been based on a percentage of between 20 and 33% of total comp..this however has recently been the area of attrition for recruiters..more and more new employers will only pay the percentage of salary

  3. Who gets all the base salary hikes? What about someone working in Product Control or Financial Accounting? Do they get anything at all?

  4. Citi’s pay increase was ridiculously low…so disappointed with this s…y bank….you even can’t afford a proper meal with the couple of quid you earn more… :-(

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