Compensation, if not the primary motive, is generally among the main motives for choosing a career in the financial markets. But these days, it's more confusing than ever to determine which banks offer the best pay plan. Guaranteed bonuses and up-front buyouts have been replaced by cash caps, deferred compensation schedules and clawbacks.
Often, it's not necessarily the firms that set aside the largest amounts for compensation but rather those that provide the best compensation structure that are the most attractive.
On an average compensation per employee basis, Deutsche Bank and UBS pay their investment bankers the most. The average compensation per Deutsche Bank employee is $434,600 while at UBS it's $372,300. Goldman Sachs ranks third with an average of $366,300 per employee, followed by Credit Suisse at $353,000, J.P. Morgan Investment Bank with $341,500 per employee and Morgan Stanley at $264,900.
But does this really paint a true picture? Do investment bankers at Deutsche Bank earn nearly two-thirds more than Morgan Stanley's? Aren’t there other variables involved such as the number of employees as well as how they are compensated, in terms of cash, stock and options?
Cash caps and deferrals
At Bank of America/Merrill Lynch, cash bonus awards were capped at $150,000 for those earning more than $1 million. Some 30 percent of the total bonus will be in either cash or "unrestricted equity" – shares that vested in February 2012.
Some investment banks are deferring an increasing proportion of bonus payments, usually in the form of restricted equity and/or restricted cash that typically vests in equal tranches over three years. There are exceptions – Morgan Stanley’s deferred cash vests in two tranches in December 2012 and the final month of 2013.
Most U.S. investment banks are generally still paying the majority of bonuses in upfront cash. J.P. Morgan, for instance, is reported to have paid an average of 65 percent to 70 percent of 2011 bonuses in cash, with those earning less than $1 million averaging 75 percent to 80 percent in cash.
Morgan Stanley has increased the average deferral rate to 75 percent, from 60 percent last year and 40 percent in 2009. Anyone earning up to $250,000 will receive all of their bonus in cash, however, and deferrals are capped at 25 percent for junior staff. At Bank of America/Merrill Lynch, deferrals only exceed 40 percent of bonus payments when the award is more than $1 million.
Clawing it back
Clawback refers to the forfeiture of any deferred bonuses that have yet to vest. Generally, it applies to bonuses that have been awarded, but not yet paid out, although regulators also require that banks put in place provisions to clawback bonuses that have already hit an employee's bank account.
The Dodd-Frank Act says listed banks would need to implement a clawback provision if the company has to issue an accounting restatement within three years of the vesting of an award. However, the rules have yet to be finalized.
Meanwhile, Morgan Stanley and Goldman Sachs have specified that managers could face clawbacks if their employees take excessive risk or exercise other misconduct.