A 37% increase in compensation expenses for a 30% increase in income DOESN'T look like a great return

BarCap has come a long way. As Bob Diamond pointed out yesterday, it wasn't entirely long ago that it employed only 3,500 people; now it employs 16,600 (in the front office).

As part of this expansionary zeal, BarCap has added a total of 2,300 people this year, of whom 750 were in equities.

But BarCap's growth-by-hiring model may be faltering. In the first half of this year, compensation costs rose by 37%, while income rose by only 30%. As Bloomberg points out, compensation per head rose from 97k to 115k as a result.

Deutsche and UBS also paid more per head in the first half of 2010. But Deutsche achieved an 11% increase in revenues for a 12% increase in compensation, and UBS investment banking revenues quadrupled on a 44% increase in personnel expenses.

Is BarCap's big hiring model broken?

Analysts are certainly starting to mutter about accelerating costs. Plenty of yesterday's questions were on this subject. Bob Diamond urged them to "relax;" John Varley said the cost base across the bank is flexible by ~30%.

The real question is the percentage of this year's BarCap hires which received guarantees. If BarCap's costs can be squeezed 30%, that's great. If not, the bank needs a big increase in revenues in what looks like a difficult second half.