Morning Coffee Jun 14 2011

Layoffs Vs. Pay cuts: How Wall Street May Trim Comp

By kyle stock

Some folks are saying investment bankers are due for a round of major pay cuts.

Return on common equity has fallen at big banks like Goldman Sachs and Morgan Stanley, but compensation-to-revenue ratios haven't budged by much.

If finance executives are going to trim comp, however, odds are good they will do so with layoffs. Bosses have historically preferred to cut jobs, which arguably is less harmful to morale and productivity.

Even in the darkest days of the recent crisis, the companies that trimmed checks had a bit of a one-for-all culture, like FedEx, which gave a 5% haircut to 36,000 workers. Finance, a business where there is often a loser on the other side of every winner, is a bit of a different animal.

And the key to making a pay cut work most efficiently is having it perceived by workers as equal and unilateral. In a recent study on people selling membership cards to German nightclubs, an across-the-board wage cut was met with a 15% reduction in productivity. However, a wage cut to only one worker in a two-person team prompted a 31% to 34% decline in productivity for that unlucky individual while their partner's productivity was unchanged.

In investment banking, a business marked by layers of seniority and a largely fluid practice of doling out the bonus pool, the appearance of even-handedness would be hard to achieve.

In other words, Wall Street may well get the axe out for shareholders, but don't look for it to swing at compensation packages, one of the industry's last sacred cows.



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