It is with great pleasure that we can bring you some good news about investment banking pay, specifically at Deutsche Bank. Overall, deferrals may actually fall this year. That's the good news. Long term, however, industry-wide investment banking pay looks like it’s in an inexorable decline.
Stephan Leithner, the European CEO for Deutsche Bank, delivered the good news in his presentation this morning.
In the first place, Leithner said that – despite its punitive new 5 year cliff vesting arrangement for 150 senior staff – Deutsche will actually defer less of its bonus pool this year than last year. Last year, 61% was deferred. This year, it will be more like 50% Leithner said.
In a second element of surprisingly good news, Leithner said that 15% of people hired at Deutsche this year have received guaranteed bonuses. In a challenging market, this seems reassuringly high – particularly when you consider that guarantees are typically only offered to front office staff, who typically only account for a third of all hires. In this case, it looks like nearly half of Deutsche’s front office hires have been offered guarantees in 2012.
Longer term, however, it looks much worse. The compensation ratio at Deutsche Bank will fall below 40% said Leithner. It might not happen this year, it might not happen next year, but it will happen. This echoes Deutsche co-CEO Jürgen Fitschen’s statement yesterday. Banks have paid too much in the past, said Fitschen, but this is changing. In future, banking careers will pay relatively less and careers in other industries will pay relatively more.
Leithner also mentioned that Deutsche won’t be accelerating vesting of stock for anyone who’s been laid off (although some banks have been doing this, apparently), that zero bonuses are now common and that Deutsche clawed back $56.3 million of bonuses last year purely on the grounds of bad behavior.
Bonuses are being blamed for everything
Notably, both Leithner and Walker identified bonuses as the chief source of all banks’ problems.
“Culture change at the end of the day has to address compensation,” said Leithner. “That is where a large part of the disconnect come from.”
“The inappropriate incentivization is accountable for a lot of what has gone wrong,” said Walker.
Walker wants all banks to publish the number of staff they employ who earn more than $1.61 million. He also wants banks to stop paying on the basis of revenue generation and to start paying on the basis of risk.
Time for M&A and equities bankers to substantially reduce their pay expectations
Anshu Jain identified the nub of the problem faced by banks in Deutsche’s Q&A session. Corporate finance and equities businesses aren’t very profitable because they have “incredibly high compensation ratios” which are “very stubborn” and very difficult to get down, said Jain.
By comparison, he said fixed income businesses have traditionally had lower cost and compensation ratios and therefore been a big profit driver (and subsidizer of M&A and equities pay). Now, however, higher capital requirements are making fixed income far less profitable. This has implications for everyone, but M&A and equities bankers may suffer most of all – particularly when market conditions are poor.
As we’ve noted many times in the past, investment banking pay has risen substantially above the mean in other industries since regulation was relaxed in the 1970s (see the definitive graph here). It potentially has a long way to fall. Median weekly earnings in the UK are a mere $804 a week.