Weak i-banking revenue but no real layoffs. What gives?

One of the attractions of the investment banking business, at least for owners and investors, is that so much of the cost structure is flexible. If there isn’t enough revenue to support the team, the team shrinks to suit the times. With Canadian investment banking revenues down between 30 and 40% so far this year, what’s curious is that there haven’t been any material layoffs on the professional side. There have been dividend and distribution cuts. And you’ve seen some trimming of back office staff and the lady who delivered the orange juice in the morning, of course, but nothing at the high end beyond some 10% salary cuts (maybe $12.5k per head per annum).

It reminds me of the classic scene in Yes, Minister, when the bureaucratic response to the the question of “can’t we find any economies?” is “well, we could lay off some of the tea ladies”.

Perhaps the reason why the i-banking reductions haven’t yet happened is simple: why layoff before bonus season when you can do it just as easily in January at a far smaller nut. Given the stock market, many investment banks will be justified next month in giving their low-to-mid performers goose eggs. Not a crappy bonus with the subtext of “find another job” as you might have seen in prior years, but no bonus at all. They are, after all, discretionary.

In January, when the time comes to calculate the severance packages, managers will be averaging the prior two years of pay, and multiplying that against 3 or 4 weeks per year of loyal service. With a zero bonus in that calculation, the severance exposure is dramatically lower than if you pulled the trigger on that same investment banker today, when the robust bonuses of 2006 and 2007 would factor into the equation.

With so many friends at the dealers, it isn’t a pleasant thought. But it might explain the paucity of layoffs so far this year….

MRM