Raising Employee Pay in Step with Falling Revenues

That is precisely what 32 large U.S. banks are doing, the Wall Street Journal’s Shayndi Raice is informing us this morning. And no, the quickly rising compensation costs are not due to a diminishing supply of labor. On the contrary, the WSJ has calculated a net jobs loss for the year to the tune of 40,000. Now, even as their revenues are falling, the surveyed banks are still on track to post their biggest cumulative profit since 2007, but, as Raice notes, unless revenue starts growing again, it would be difficult to keep these profits up. After all, there is only so much staff you can cut, without causing more harm than good.

Presumably figuring out how to increase these revenues is the primary occupation of a good number of those bankers whose pay is being increased at such a crisp rate. And, as another WSJ report points out, at least on the retail side of the banking spectrum, the still-employed have their work cut out for them. One would assume that these survivors should be under heavy pressure to prove that they can get the job done better than the legions of their less fortunate former colleagues who are eager to get their chance. Yet, solutions have so far proved elusive.

Bank Revenue and Employment Down, Profit and Pay Up

The numbers are quite impressive. Here is what the WSJ has found on the pay increase issue:

Salaries, benefits and other compensation at 32 large, publicly traded U.S. financial companies are on track to hit a record $207 billion in 2012, according to an estimate by The Wall Street Journal based on data through Sept. 30. The average employee would get $128,089 this year, up 4.2% from 2011.

That’s a healthy pay raise. Moreover, Shayndi tells us, “the 32 firms are on track to post their largest profit since 2007, with net income of almost $91 billion”. They would do that in spite of falling revenues, which are projected to be lower by 7.2 percent this year than the total for 2010.

Yet, we are told, higher pay is justified by “intense competition for top workers, higher health-care costs and a perceived need to gird for expansion in areas seen as likely to grow once the economy rebounds”. Rising health care costs are indeed an issue, but the other two justifications are not convincing, I think. Competition for top workers is a permanent fixture in pay considerations and I don’t see how it can be argued that its importance is higher in a soft labor market like today’s. And girding for expansion by cutting your work force simply doesn’t make sense to me. What is more, we are talking about serious cuts here. The cumulative job losses in the banks surveyed by the WSJ amount to 2.5 percent of the total work force this year alone and “[m]any have promised further job cuts”. Goldman Sachs’ Lloyd Blankfein offers what I find to be a more sincere and convincing explanation of what’s going on:

There’s a problem of firing at the bottom and overhiring at the top.

Viewed in this light, there is nothing paradoxical going on, as those “at the bottom” are proving to be as dispensable as ever.

The Revenue Conundrum

Record-high as this year’s profits may be, declining revenue is a big issue and an especially big one for retail banks. The big debit card issuers are yet to find a reliable source to replace the billions of dollars in lost debit interchange revenues, caused by the Durbin Amendment. JP Morgan, Bank of America and Wells Fargo each lost hundreds of millions of dollars annually.

Additionally, as the WSJ’s Raice and Sidel remind us, serving low-balance depositors is also proving a money-losing proposition; and there are many of them:

For Bank of America, a focus of the review is to reduce losses the bank takes on the 20% of customers who keep modest balances on deposit and don’t use other products, such as credit cards or mortgages.

…

The second-largest U.S. bank by assets wants to find ways to encourage those 10 million customers to set up a $250 monthly direct deposit or to sign up for loans or other products — moves that would increase bank income and shield the consumers from fees. The company is seeking to build on gains in its mobile-banking business.

So far, encouragement has not worked and at least one rather more forceful nudge turned out disastrously. To make matters even worse for the banks, following the implementation of the CARD Act, stricter overdraft rules forced many of them — including Bank of America — to abandon this revenue stream altogether. Overall, overdraft revenue fell by $3.6 billion in 2011, according to American Banker. Revenues from checking account fees and prepaid cards are mentioned as potential replacements, but these are yet to be developed.

The Takeaway

So, the still-ongoing aftermath of the financial crisis is a matter of perspective and, as the two WSJ reports clearly illustrate, that certainly holds true for people employed in the banking industry. And it is also tempting to conclude that the “overhiring at the top” is especially pronounced this time around, even as the treatment of those “at the bottom” is not significantly different from the usual norm. But then, why would it be any different? As Blankfein’s comment, when taken in context, makes it abundantly clear, banks see those in the latter category as fungible — identical items to be added to, or subtracted from, the total as needed (much like, say, web servers) — unlike their more senior colleagues who are afforded more personalized treatment. If that’s the case, the whole firing and hiring thing makes perfect sense, doesn’t it?

Image credit: Wikimedia Commons.