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Goldman, Credit Suisse, Barclays to Eliminate Jobs

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IN THE PINK
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Investment banks have started cutting jobs in response to current economic conditions. Yesterday the Wall Street Journal reported that both Credit Suisse Group AG and Barclays PLC have started eliminating positions, and more banks will follow.  Goldman Sachs also warned that it may ax 230 jobs, and the company is expected to continue axing positions through the rest of the year.

According to some, the cuts are in part due to the post-crisis decision at many Wall Street firms to drastically cut pay bonuses. In response to popular ire and TARP compensation limits, the banks cut high bonuses in favor of higher base salaries. But a New York Times Dealbook article reports that total compensation actually changed very little, quoting pay consultant Alan Johnson: “What’s really happened is you’ve traded your salary going up $100,000 for your bonus going down $100,000.” The unintended consequence of this is higher fixed compensation liabilities for banks; liabilities they’re having trouble meeting as profits shrink.

As a result, where in the past banks would simply have cut bonuses for low performers, they're now getting rid of low performers all together.

Some bankers are already up in arms, according to the Dealbook story, which quotes Kian Abouhossein, an analyst at J.P. Morgan Cazenove in London. “We see higher base salaries helping underperformers in a downturn at the expense of top performers, which could result in the best people leaving the industry in a downturn,” he said.

The compensation shifts also open up an interesting analogy between banking and the world of professional sports. In the NFL, for example, it's standard practice to offer players signing bonuses in lieu of guaranteed contracts. This policy allows teams to cut underperforming players quickly and easily.

The main purpose of these bonuses is to allow teams to skirt around salary cap restrictions. In a similar way, shifting compensation from bonuses to salaries has, so far, allowed banks to both follow TARP’s guidelines and pay lip service to public uproar over bonuses.

In both cases, these methods serve to protect the status quo in times of financial hardship. Football players’ non-guaranteed contracts allow teams to restructure their payment from year to year, maximizing profit for the franchise. For banks, layoffs seem to be replacing significant shifts in individual compensation. According to the US Bureau of Labor Statistics, financial services employment in New York is down about 8% from 2007 levels though individual compensation has changed very little.

Oddly enough, most people have trouble sympathizing with both professional athletes’ and bankers’ money troubles, but these impending layoffs do point to an important issue. So far, there has been little change in compensation in the banking industry as a whole. While layoffs may appear to correct this trend, they really just allow banks to keep pay rates at pre-crash levels even as profits shrink.

Meanwhile, Daniel Indiviglio, associate editor at the Atlantic recently argued that banking layoffs could be indicative of future layoffs in other sectors. He writes, "From January through May, the financial sector cut 11,413 jobs. That's a 21% increase over last year's tally of 9,431 over the same period, according to outplacement company Challenger, Gray & Christmas, Inc. Should this concern us?"

Maybe, but job cutting has been the trend in many industries for the past couple years. It seems equally likely that the banking industry is finally catching up with new economic realities.

See also: Lloyd’s Announces 15,000 layoffs and HSBC to Cut 700 Jobs in UK.
POSITION:  No positions in stocks mentioned.

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