A Q&A with the compensation expert who thinks banking pay could fall another 50% in five years

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What’s happening with investment banking compensation? Are lower pay and higher deferrals really inevitable? We asked Jon Terry, remuneration partner at PricewaterhouseCoopers.

Q: Over the next five years, how much would you expect investment banking compensation to fall by – on average?

A: Two big factors are likely to influence compensation levels: profitability and the share of profits distributed to employees.

If banks continue to de-risk, profits will fall. If shareholders demand a higher share of profits, pay will fall exponentially.

We’ve seen broadly lower levels of compensation as a proportion of profits over the past two years and this is likely to continue. This could result in overall compensation levels falling quite substantially – maybe by as much as 20 percent to 50 percent over the next five years.

Q: Is there any good news?

A: Yes. Pay could rise eventually.

Q: Why would that happen?

A: If banks ring-fence or separate their investment banking divisions, shareholders may accept higher investment banking compensation levels as the price to pay for their exposure.

Q: Come 2015, how would you expect the average bonus at a large bank to be structured?

A: Over 50 percent will be in deferred stock or instruments linked to the bank’s underlying long term exposure. This will apply at even modest levels of bonus and a higher proportion will be deferred at higher levels.

Q: What are the three biggest challenges facing banks in terms of compensation now?

A: Financial uncertainties are reducing profits. It’s difficult to identify the small number of truly alpha-generating employees. And there’s pressure from external stakeholders (media, regulator and government) on perceived appropriate levels of pay.