Banking bonuses set to disappoint in City and on Wall Street
A Wall Street sign near the New York Stock Exchange©AFP
It is the time of year when most bankers are focused on one magic number: their annual bonus. But this time many look set to be disappointed, as banking executives and analysts predict a fall in overall payouts to staff in the City of London and Wall Street.
At US banks, several of which report results this week, traders and investment bankers are fighting over a diminished bonus pool, according to executives. In the UK, most investment banks expect to see bonuses fall after a tough year, but political sensitivities over bankers’ pay are higher than usual in an election year.
One finance officer at a large Wall Street bank said it had been difficult to satisfy the warring parties: mergers and acquisitions and equity underwriting enjoyed a good year but these bankers never suffered the same bonus cuts as traders so they should not expect a big rebound in payouts.
Traders, in contrast, expect another fall after a weak fourth quarter. Citigroup decided last week that the bonus pool for traders would fall about 5-10 per cent, according to people familiar with the matter, after earlier pledging to hold it flat. Citi’s investment bankers can expect a modest increase.
In London people close to big City investment banks such as Deutsche Bank and Barclays said their bonus pools had been hit by weaker fixed-income trading figures and the impact of a European bonus cap, limiting payouts to no more than twice a banker’s fixed pay.
Tom Gosling, head of PwC’s reward practice, said: “Bonuses in the UK banks will almost certainly be down, but the problem for the industry is that the public’s trust in banks has never really been rebuilt so, for some, any level of bonus will be too much.”
Some banks, such as HSBC and Royal Bank of Scotland, are expected to deduct from their bonus pools part of the record $4.3bn fines for foreign exchange manipulation that they and four other banks — UBS, JPMorgan Chase, Bank of America and Citi — paid to regulators in November.
Goldman Sachs, often the barometer for industry bonuses, is forecast to pay staff about 38 per cent of revenues in salaries and bonuses. That would be in line with last year’s payout, which was the second-lowest in Goldman’s 15 years as a public company. Before the financial crisis, Goldman typically paid staff more than 40 per cent of revenues.
Rather than political pressure, the current parsimony is enforced more by investors pushing banks to give them a bigger share of the pie via higher shareholder returns.
“The trend is that compensation is trending downwards rather than upwards,” said Mike Karp, chief executive of Options Group, a recruitment company. But US banks are being more generous than their European rivals, particularly by paying more in cash than stock.
Morgan Stanley announced late last year that it would pay a bigger proportion of bonuses in cash — in part to head off criticism that its larger-than-average deferred pay was adding too much cost to future years and in part to satisfy staff. “The Europeans are going to be behind the ball in paying out in cash,” Mr Karp said.
Mr Gosling at PwC, who estimates bankers’ bonuses have halved since the financial crisis, said: “The [other] problem that British banks have is that they aren’t the price setters in this market — that is the foreign investment banks.”
The top 121 UK bankers at Goldman Sachs were the best-paid among their peers in Britain in 2013, earning an average of £3m each, according to regulatory filings. But the Office for National Statistics said total UK financial sector bonuses last year were down about a quarter from their peak in 2007.
With trading revenues still under pressure, Mr Karp at Options Group predicted more competition for traders who could make money. “The pie is not getting bigger; everyone’s going for a bigger slice,” he said.
“The war for talent is going to heat up this year because everyone wants this 35-37 year-old who can make $200m in revenues, whether he’s in credit trading or rates trading.”