Big Banks Raised Salaries to Make Up For Bonus Curbs

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It's official: At large financial firms, salaries are up and cash bonuses down. That's been the most visible response thus far to regulators' and lawmakers' moves to rein in bankers' compensation, according to separate surveys issued recently by eFinancialCareers and by Mercer, the global consulting firm.

In the eFC survey conducted late last month, 46 percent of Wall Street professionals said their pay structure has changed since the financial crisis. The most frequent change cited is higher base salaries to offset smaller performance-based compensation. "With the Federal Reserve issuing their final guidance on incentive compensation, we can surely expect to see more adjustments to pay structures over the next few months," says Constance Melrose, managing director of eFinancialCareers North America.

Separately, Mercer's April survey of 39 U.S. and European financial service firms released last week reached the same conclusion. Almost all participating firms altered their pay structures, and 70 percent raised salaries while reducing annual cash bonuses. A majority of the companies placed caps on both overall bonus pools and individual payouts and significantly limited or eliminated one-year bonus guarantees, while 76 percent limited or eliminated multi-year guarantees.

Steps Aim To Link Pay With Risk

In line with other bank regulators in the U.S. and elsewhere, the Fed has zeroed in on the potential for incentive pay to influence risk-taking, whether for good or ill. Its final guidelines issued June 21 nudge managements to better tie incentive compensation to risk, such as by deferring bonus payments and giving more weight to long-term rather than short-term performance when setting awards.

The Fed also wants banks' risk management staff to have input in designing incentive structures. Observes Melrose: "Money matters on Wall Street, so it's probably safe to say risk managers will matter even more now to their colleagues." In the eFC survey, risk managers were ranked by their colleagues as the third most-underpaid department, after operations and technology.

Meanwhile, the European Parliament approved tough new pay curbs for bankers Wednesday - including a requirement that at least 70 percent of every bonus be deferred for up to five years. Those rules, slated to take effect in January, aren't limited to Europe-based banks or activities within Europe. They also will cover foreign banks operating within the EU and European banks' operations outside of the EU.