The bitter disappointment of the unaffordable banker

18 February 2011

2 minute read

The bitter disappointment of the unaffordable banker

UBS announced its bonuses yesterday. Even though the total compensation bill in the investment bank increased more than 20% year on year, and even though compensation per head rose 13%, people are not happy.

"Everyone was expecting UBS bonuses to be dire and they seem to be even worse," says one headhunter working in the advisory markets. "Bonuses are down and salaries have been frozen for some associate directors 2s who've moved to associate director 3. People are pretty glum."

"It's a barbell effect," says the head of another search boutique. "They've paid the new boys - the graduates and they new joiners - and they've paid the high performers. A lot of other people have got nothing."

Deferrals seem to be a further cause of distress.

Directors and above at UBS are rumoured to be getting 50% deferrals. Senior associate directors are getting 30% deferrals. At Citigroup, senior associates were allegedly paid entirely in cash.

The harsh light of the horrible new reality

It's not only UBS bankers who are feeling mistreated. Many of Morgan Stanley's equity researchers are also said to be very unhappy after being paid less than they expected. Apparently, they want to leave.

However, as the Financial Times points out today, banks' pay is still too high. It needs to fall by another 16-39%.

The FT bases these calculations on the need for banks to reach a 15% ROE target. It points out that even after pay had been reduced 15-39%, pay for the average banker would remain five times more than the median employee in the rest of the economy. If banks reduced pay to just 130% of the median, their ROE would be even higher.

Here are the FT's charts:

Source: Financial Times

Banking analysts share the view that compensation must come down. "Either remuneration needs to be reduced, or headcount has to fall," muses Peter Thorne at Helvea. "Unfortunately that's going to be the only real option unless revenues recover, which seems unlikely."

AUTHORSarah Butcher

Global Editor

wc
wchap69
21 February 2011
The FT article is nonsense. Exploring only a single factor (remuneration) to reach a target ROE (15%) is unrealistic and doesn't consider at all the likelihood that the reason the bank generated the transaction revenue in the first place was the result of the employee. Lose the employee, lose the relationship, lose the revenue. Your ROE target is now further away.
Perhaps the FT article should have argued that office rents should come down to help banks hit ROE targets. Or perhaps they should just charge higher fees?
Comparing banker pay to the overall median is similarly unrealistic - and how did we arrive at 130% of median as the proper range? The "overall median" includes your waiter, mechanic, shop clerk, and pizza delivery boy. It gives no value to the level of education, quality of work, or level of responsibility.
Generating revenue in the banking industry doesn't just "happen" - it is the combination of capital and infrastructure, ingenious ideas, and execution. The banks provide the capital and infrastructure while the employees provide the ingenious ideas and execution. If you underpay the employees, they will take their ideas and execution elsewhere.
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an
anon
18 February 2011
I wonder how much of the revenues are directly related to "high quality" applicants. Feels like just a cyclical industry and a rising tide raises all boats.
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Sa
Sarah, Editor, eFinancialCaree
18 February 2011
@Beenround - thanks. I did know that, but momentarily forgot. I checked again with the source and it's been amended.
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Be
BeenAround
18 February 2011
I really have to question detail in your article when you start talking about things such as VPs. UBS does not have VPs or senior associates. They have Associate Directors who get promoted to Directors!!
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Gr
Grad
18 February 2011
Love the static analysis. Apparently noone has thought about the fact that drastically lower pay means less quality applicants and shorter hours, meaning less revenue. Hence the FT's analysis is severely flawed.
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