Salary increases have had little impact on the latest redundancy decisions
In theory, the new remuneration rules have a lot to answer for; investment banks raised salaries last year to compensate for reduced cash bonuses and now, with costs fixed, the only option is to cut staff rather than the bonus pool.
Along with sliding revenues, this one of assumptions postulated by various newspapers as one of the reasons for the recent redundancy announcements. As one broker told the Sunday Times: "I'm either going to have to cut salaries by 20% or get rid of about 20% of my people."
It would, however, not only be overly-simplistic to blame salaries for the latest round of culls, it would be wrong, says Jon Terry, head of the reward and compensation practice at PricewaterhouseCoopers.
Conservative increases
"The number of very large salary increases - 300-500k plus - were only given to a very small proportion of senior people or top performers in investment banks," he says. "Other salary increases, while relatively widespread, were not large enough to have a material effect on banks' compensation costs."
In the UK, few investment banks have spiralling salaries as a major issue in their recent reports. The only references to wage inflation being a concern is within Asia and Latin America, where competition for staff has been stiff.
Investment banks were generally "cautious" when it comes to salary increases, says Terry, to avoid a scenario when compensation costs became too much of a burden. "A 500k pay rise might seem a lot to your average member of public, but when the individual concerned earns a 4-5m bonus, it's a conservative figure," he says.
There's also been little clarity about where, exactly, the investment banking cuts will occur. While most assume that banks' fixed income trading teams will be culled, there's also - especially in the case of the huge redundancies unveiled at HSBC - a tendency to cut costs from the back office.
"The big question is how many of these cuts will hit back office functions, rather than revenue generators," says Chris Page, associate partner in the compensation practice at KPMG. "Banks will always look for performance incentives for people who add value to the business."
No going back
One solution to avoid further redundancies, albeit a slightly impractical one, would be to reduce salaries and hope employees are willing to accept bonuses with a smaller cash component and bigger deferrals. There's a regulatory issue here, however.
"If a bank admits that the salary rises were not simply that, but a method of compensating for reduced bonus payments, they're essentially saying the pay rise is a guaranteed bonus. The regulator is unlikely to view this favourably," says Terry.
