As bonus season rolls around again, it is clear this will not be a vintage year for compensation. We’re talking Range Rovers rather than Ferraris.
Of course, some bankers will always do better than others and it is impossible to generalise too broadly when it comes to pay. But it is also hard to escape the overall trend.
This is especially true for bankers at international firms in Asia, who tend to get paid after their counterparts in the home market — a lesson they learnt during the global financial crisis, when loss-making US bankers were protected and profitable Asian bankers got the dreaded doughnut (or big fat zero).
Bankers in Asia are still paying for their colleagues' missteps in New York and London, with the world’s biggest institutions on the receiving end of another battering from regulators and prosecutors in 2013.
US banks were the first to report full-year earnings, as is customary, and their results showed that business was more or less flat compared with 2012, thanks in part to fines and legal bills that ran into the billions of dollars for most of the big investment banking names. That means less money for everyone.
Most of the fines related to the fixed-income side of the business, and particularly rates — courtesy of the Libor scandals. That will obviously affect compensation for everyone in that area but others will do relatively better. Equities came back somewhat last year and the view from headhunters is that Asian bankers who churned block trades during 2013 will be among the year’s biggest earners.
But compensation is once again a sensitive subject, or as one headhunter put it: “Everyone still hates bankers.”
That’s hardly surprising, of course. Fresh scandals keep coming despite the supposed lessons of the crisis, reinforcing public perception that the industry is collusive, self-centred and irresponsible.
Some within the industry understand the criticism. “Look, news stories of huge bonuses are clearly not helpful at a time when the middle class is hurting,” said one banker.
This is particularly true when bank profits are seen as heavily subsidised — a product of government guarantees, discounted borrowing costs and taxpayer bailouts.
In Europe, such sentiments have led to a political backlash and proposals to cap banker bonuses. The essence of the idea is not terrible: bankers should be rewarded for winning business that benefits the institution in the long term, instead of profiting from trades that end up as long-term liabilities.
Salaries and shares
Incentives matter, as any economist will admit, but capping bonuses will not create the incentive that EU lawmakers want. Instead, total compensation will be unchanged, with more money in the form of salaries and shares, and less in the form of bonuses and cash. This will not make banks better corporate citizens.
It could even harm them. The British government fears that a bonus cap will put Europeans at a competitive disadvantage to their American counterparts and may make it more difficult to cut compensation costs in bad years.
Such fears probably underestimate the creativity of the financial community. It is particularly telling that none of the recruitment specialists we spoke to thought the EU rule would make any difference at all, especially for top bankers (who get the big bonuses).
“American banks pay a lot of cash,” said one headhunter, “and we would certainly point out the difference to clients. But it’s not going to be a material factor in deciding whether or not to take a senior position at a European bank versus an American one. People aren’t very worried about it.”
Even City law firm Clifford Chance has played down the effects of the proposed EU rule. “In practice there may be a number of options available to firms that will allow them to increase fixed remuneration in a way that retains as much flexibility as possible over the form and timing of payment,” it said in a note sent to clients.
Life is much simpler for American bankers. “As long as shareholders are happy, that’s all that matters,” said the headhunter.
Keeping shareholders happy has another benefit: senior bankers are also substantial shareholders in their own right, which means that bank CEOs can point to lower overall compensation ratios even as they spend billions on share buybacks that drive up the value of their own stock holdings.
Goldman Sachs, for example, spent $6.2 billion buying back its own shares during 2013, a figure that is slightly higher than its investment banking revenue for the year and which helped its share price to rise 20%.
“Our work in advancing our client franchise and in ensuring continued cost discipline has allowed us to provide solid returns even in a somewhat challenging environment,” said Lloyd Blankfein, Goldman’s chairman and chief executive, as the bank announced its earnings.
Bank of America Merrill Lynch bought back $3.2 billion, or almost double its investment banking revenues, while its share price rose roughly 50%.
This is apparently a good deal for everyone. Shareholders see strong returns, politicians and regulators see falling or stable compensation ratios, and top executives get double-digit pay rises.
Asia under less scrutiny
But even US banks are getting more scrutiny these days. Jamie Dimon, JP Morgan’s chief executive, has come under intense pressure since the $2 billion London Whale trading loss.
One headhunter observed that the anti-banker environment in developed markets could even be good for banks in Asia.
“DBS is sitting pretty,” said the headhunter. “It pays people very well, at least at the top of the house, and is a very difficult bank to recruit away from. People like working there.”
Could Asia find room for more banks like DBS? Could CIMB or the Japanese or the Australians finally win real market share in their own back yard?
Not soon, perhaps, but it is certainly true that bankers in Asia face far less scrutiny than elsewhere and that banks without substantial businesses in the US and Europe have a much lower cost of business. Being an Asian-focused bank could one day prove to be a major advantage.
