Why there WON'T be another substantial rise in investment banking salaries this year
The EU is introducing new bonus rules, but who cares? Past experience suggests banks will simply increase salaries to compensate. Last year, needless to say, some front office salaries were hiked more than 100%.
Hiking salaries appears to make good regulatory sense. "Rather than focusing on total compensation, regulation is almost universally focused on restricting bonus levels," says Jon Terry, head of compensation at PricewaterhouseCoopers.
However, anyone who thinks they've got another mega salary increase coming in next few months may end up disappointed. The general consensus is that banks might increase salaries a bit, but not much.
Another huge hike won't be forthcoming because:
1) These are different times
This time last year, we'd had a dramatic recovery from a dramatic slowdown. Hiring was resuming after a long break and there was a sense of pervasive optimism. This time this year, M&A is at a six year low, and the FICC revenues which powered the recover appear to have collapsed in the second quarter. In this environment, will banks really want to hike up fixed costs? No.
2) The future looks uncertain
The first phase of the crisis may have passed, but the sovereign debt issue hasn't.
"We're in a much less predictable environment today," says one senior-banker-turned-academic. "In the third and fourth quarters of 2009, people thought banking was back. They felt a lot more comfortable raising costs.
"Today, the future is a lot less predictable," he adds. "This is not an environment in which to be increasing long term spending commitments"
3) Bankers are more stable now
Increasing salaries last year wasn't just about avoiding bonus legislation. It was also a method of retaining disgruntled staff after a poor bonus round in 2008. Hence, UBS, which paid particularly badly in 2008, was the first to hike fixed pay.
This year, there is less concern about a mass exodus. It helps that most banks have largely finished their 2010 front office hiring and are biding their time until bonuses are paid in 2011.
4) Salaries have already been increased massively
Salaries are already double what they were. "There is a limit to how much you can hike salaries before it starts to become uneconomic," says Terry. "Away from the large banks, there are a number of organisations that still have scope to increase salaries, but at larger organisations it will quickly get to the stage where it becomes uncommercial," he adds.
