Goldman's City staff don't have to take new salary reductions lying down (but maybe they should)

Back in July we said that Goldman Sachs had added a clause in its contracts to UK-based bankers saying that any pay rises would be subject to review after 24 months. Now, according to Financial News, this clause has been invoked and salaries are going to be slashed.

Goldman's City employees would have been aware of the clause, even if they didn't anticipate it being so quickly enforced, so a mass exodus of staff is not expected. It applies to staff at vice president to managing director level.

Nonetheless, some people could challenge the decision.

"Employees may claim pay reductions in certain cases have been imposed 'irrationally', whatever their contract may say - particularly if the bank has been selective rather than, for example, imposed the cut across a department as a whole for a department as a whole," says Richard Fox, head of employment at lawyers Kingsley Napley.

There's also the argument that relying on a salary reduction clause is a breach of an employer's duty of mutual trust and confidence, he adds. Other banks will be watching closely to see how Goldman fares in invoking this salary reduction clause, says Fox.

In some ways, it could be said that Goldman has some foresight that other banks have missed, though.

Salaries were increased across the board at most banks in anticipation of an onerous regulatory crackdown on compensation. In the event, however, the most punishing deferrals to bonus payments only apply to a small band of 'code staff'.

Now, banks are stuck with much higher fixed costs, across most levels from associate through to MD. These have obviously become untenable in the wake of tumbling revenues and redundancies have become commonplace. If you don't get a bonus, you still have a high salary to fall back on and, as BarCap co-head Rich Ricci told the FT last week, "when a banker doesn't get a bonus, they no longer leave automatically."

Without a clause like Goldman's, other banks may find it difficult to follow its lead. Aside from the fact that employment law prevents a reduction in salary without consent, there's a whole regulatory can of worms around this.

As Jon Terry, head of head of the reward and compensation practice at PwC told us previously, if a bank admits it's paying larger base salaries to compensate for a reduced bonus: "They're essentially saying the pay rise is a guaranteed bonus. The regulator is unlikely to view this favourably."

Unless investment bankers agree to a blanket reduction in salaries, more job cuts seem inevitable. Goldman's London employees should therefore consider themselves in a more secure position than most.