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The terrible truth about the coming redundancies

It’s becoming harder to find a bank that hasn’t already laid off at least 10% of its staff. But with revenues still catastrophically low, headcount reductions to date could prove a pinprick compared to what’s coming next. Based on average pay per head for the year so far, we’ve calculated how many more people each bank would need to cut in order to maintain its compensation ratio (compensation costs as a percentage of revenues) in line with 2007. The results range from the farcical (Merrill Lynch) to the disturbing (Credit Suisse), and the reassuring (Goldman and Morgan Stanley).

Merrill Lynch

Revenues Q1-Q3: 2008 – $834m; 2007 – $19,442m

Compensation costs Q1-Q3: 2008 – $11,170m; 2007 – $11,564m

Compensation ratio Q1-Q3: 2008 – 1,339%; 2007 – 59%

Headcount Q3: 2008 – 60,900; 2007 – 64,200

Average comp per head: 2008 – $183k

Layoffs over the past year: 3,300

Layoffs required to maintain compensation ratio: 58,195

Credit Suisse (investment bank only)

Revenues Q1-Q3: 2008 – CHF2,736m; 2007 – CHF16,217m

Compensation costs Q1-Q3: 2008 – CHF5,682m; 2007 – CHF8,111m

Compensation ratio Q1-Q3: 2008 – 207%; 2007 – 50%

Headcount Q3: 2008 – 21,300; 2007 – 20,399

Average comp per head: CHF266k (US$228k)

Layoffs over the past year: None; 1,000 staff added*

Layoffs required to maintain compensation ratio: 16,161

Deutsche Bank

Revenues Q1-Q3: 2008 – €6,102m; 2007 – €14,620m

Compensation costs Q1-Q3: 2008 – €3,250m; 2007 – €5,217m

Compensation ratio Q1-Q3: 2008 – 53%, 2007 – 36%

Headcount Q3: 2008 – 15,574; 2007 – 17,215

Average comp per head: 2008 – €209k

Layoffs over the past year: 1,668

Layoffs required to maintain compensation ratio: 5,130

UBS

Revenues Q1-Q3: 2008 – minus CHF21,418m; 2007 – CHF11,065m

Compensation costs Q1-Q3: 2008 – CHF4,589m; 2007 – CHF8,326m

Compensation ratio Q1-Q3: 2008 – unquantifiable; 2007 – 75.2%

Headcount Q3: 2008 – 18,901; 2007 – 22,666

Average comp per head: 2008 – CHF243k (US$208k)

Layoffs over the past year: 3,765**

Layoffs required to maintain compensation ratio: Everyone

JPMorgan (investment bank only)

Revenues Q1-Q3: 2008 – $12,516m; 2007 – $14,998m

Compensation costs Q1-Q3: 2008 – $6,535m; 2007 – $6,404m

Compensation ratio Q1-Q3: 2008 – 52%; 2007 – 43%

Headcount Q3: 2008 – 30,989; 2007 – 25,961

Average comp per head: 2008 – $211k

Layoffs over the past year: None; 5,298 staff added

Layoffs required to maintain compensation ratio: 5,647

Morgan Stanley

Revenues Q1-Q3: 2008 – $22,881m; 2007 – $28,476m

Compensation costs Q1-Q3: 2008 – $10,726m; 2007 – $13,365m

Compensation ratio Q1-Q3: 2008 – 46.9%; 2007 – 46.9%

Headcount Q3: 2008 – 46,383; 2007 – 47,713

Average comp per head: $231k

Layoffs over the past year: 1,330

Layoffs required to maintain compensation ratio: No additional layoffs required

Goldman Sachs

Revenues Q1-Q3: 2008 – $23,800m; 2007 – $35,246m

Compensation costs Q1-Q3: 2008 – $11,424m; 2007 – $16,918m

Compensation ratio Q1-Q3: 2008 – 48%; 2007 – 48%

Headcount Q3: 2008 – 32,569; 2007 – 29,905

Average comp per head: 2008 – $351k

Layoffs over the past year: None; 2,664 staff added***

Layoffs required to maintain compensation ratio: No additional layoffs required

· *Between Q1 and Q308 vs. Q1 and Q307, excluding 500 layoffs announced in October

· ** Between Q1 and Q308 vs. Q1 and Q307; excluding 1,901 layoffs announced in October

· ***Between Q1 and Q308 vs. Q1 and Q307, excluding 3,200 layoffs announced in October

Comments (18)

Comments
  1. You are assuming they will maintain this ratio – why?

  2. Surely it’s easier to just cut pay? Most of it’s paid in bonus anyway, and those people getting donuts this year will help reduce the comp/revenue ratio.

  3. Hi CT and Rohan,

    It should be easy to cut pay in theory. But compensation figures for the first ninth months of the year, which include accrued bonuses, suggest banks aren’t cutting overall bonus pools in line with revenues (although they may be planning to allocate bonuses only to top peformers and to give everyone else little or nothing).

    As a result, pay is rising dramatically as a % of revenue. Either bonus accruals will have to be slashed massively in the fourth quarter, or headcount will have to be cut, or shareholders will have to live with substantially higher compensation ratios from now on.

    Sarah, Editor, eFinancialCareers Reply
     
  4. JPM may not have made any lay offs in 2008, but they have already started cutting staff. Approx 8% of head count has already been cut, with more redundancies happening almost every month. Also with JPM why have not the redundancies at Bear been taken into consideration?

  5. If the measure in produces results which can be farcical (and ignore the fact that you still need employees to run a bank), then surely the measure itself is farcical and an article which uses it as the basis of a story is also a farce.

    Trevor Treblant Reply
     
  6. Sarah,
    I am happy to find the oppportunity to ask a question to an Editor. This question as been suggested to me buy the daily BBC breakfast news, and by the words you use in the title of your article.
    The question is:
    What do you think of the role of the newspapers and TV in the crisis should be, given that the trust of people in the future is a critical parameter to limit the extend of the recession?

  7. how can you have a negative revenue … looks like you’ve got your stats wrong … to illustrate an obvious point … The less Robert Peston like articles we have the better for everyone.

    not at one of those Reply
     
  8. Revenues at UBS investment bank were negative due to losses in FICC.
    Eric, I think the roll of the press is to report and analyse events in order to offer a perspective on the future. This article paints a worst case scenario. It’s unlikely to happen, but shows how much banks would need to cut headcount by if they were to maintain compensation ratios.

    Sarah, Editor, eFinancialCareers Reply
     
  9. Hi Sarah,

    This is an interesting study, but instead of taking peak market earnings/compensation, I would have taken “normal” (average over a cycle) numbers.. maybe 2007 was way too high?

  10. According your numbers credit suisse is running at a major loss for this year. Even If the compensations costs are deferred bonuses, this does not bode well for the bank.

  11. Puzzled – the figures are for Credit Suisse’s investment bank only. In the first nine months of the year it made a loss of CHF6,404m.

    Sarah, Editor, eFinancialCareers Reply
     
  12. Hi Bear,

    The figures for potential redundancies are based on maintaining compensation as a constant percentage of revenues, rather than on maintaining absolute comp at 2007 levels. Most US banks try and keep compensation costs at around 50% of revenues in good times and bad times, with salaries boosted by bonuses when revenues rise.

    This being the case, 2007 compensation ratios should be roughly representative of the cycle. 2008 figures look set to be an anomaly. The question is how long banks/shareholders will be willing to tolerate this.

    Sarah, Editor, eFinancialCareers Reply
     
  13. What about BarCap?

  14. How can you not include ‘Citigroup’?
    They are the frontrunners in making people lose their jobs after Lehman Brothers.
    They are also going to write off another USD 500 Billion of assets in next two years which will make their total assets to USD 1.7 trillion from USD 2.2 trillion.

  15. Citigroup aren’t included simply because they don’t break out headcount or compensation for their investment bank.

    Sarah, Editor, eFinancialCareers Reply
     
  16. Loved the conclusion on UBS. I dun understand these guys that keep rubbishing the articles and yet kept coming back to read and comment each time a new one is posted. Obviously the measure was not meant to be conclusive or published in an academic journal.

  17. also, according to these calc surely you need to base staff cuts coming on Q1-Q3 2009 revenues , so shouldn’t you be giving us implied or expected 09 revenues? And what are these based on? Are we assuming they will be flat on 08. Or are we just talking about Q4 08? This all seems to elementary.

  18. Credit Suisse and UBS have never made a penny outside Switzerland. hard to believe but true.

    All the IB units in london and NY do, is justify executive compensation.

    however, ubs makes USD 8bn. with out doing anything. just from their wealth management platform. that is actuaklly the big plus and shows where they should focus. let go what has not even worked in best times..

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