This is what's really coming for investment banking salaries, and it's coming soon
There are 17 weeks until the end of 2013. Unless the European Union relents and decides to delay the introduction of the bonus cap until 2015 as requested by the British Banker's Association last week, that gives banks just 17 weeks to get their compensation in order.
The EU's bonus cap will restrict bonuses to a maximum of 250% of fixed pay from January 2014. Bonuses paid in early 2014 for work done in 2013 won't be affected by the cap. But the cap will apply to any work done in 2014. If banks want to increase fixed pay and sidestep the cap, compensation experts say they must therefore do so before January.
"You're going to see fixed pay increasing at most banks and you'll see it happening in the next few weeks," Jon Terry, a partner specializing in compensation at PwC told us. "We're working with banks to help them deal with the changes."
In June, a survey by Towers Watson found that over 50% of banks were planning to increase fixed pay in response to the bonus cap. However, any bankers expecting a blanket increase in salaries will be disappointed. Compensation specialists say pay increases will be piecemeal. They will also be non-pensionable.
"People keep talking about banking salary increases, but that's not what's going to happen," said Terry. "Instead, banks are going to offer non-pensionable cash allowances to the people affected by this cap. It will be done on an individualized basis - not everyone will get the allowances. And those who do will get differing amounts depending upon how much they earn."
Sorry, there will be no big and widespread increases in banking salaries
35,000 employees at banks have the potential to be affected by the bonus cap. However, only a tiny small proportion of those 35,000 are likely to receive one of the new cash allowances. Bonuses which defy the cap and exceed 2.5 times fixed pay are already rare. Recent figures from the banking pay benchmarking site Emolument show that bonuses were an average of 2.2 times salaries for 2012 for managing directors at J.P. Morgan and Nomura, for example.
Big across-the-board salary increases just won't happen, therefore. When UBS increased salaries for its investment bankers in May, it did so by varying amounts, with the maximum increase said to be a merest 25%. This was considerably less than the salary increases of 100% or more implemented by investment banks in the immediate aftermath of the financial crisis.
Sam Whitaker, a counsel in the executive compensation practice at law firm Shearman & Sterling LLP, said only a few hundred bankers are likely to receive new non-pensionable cash allowances to help sidestep the bonus cap. Terry agreed: "The number of people getting these allowances will be in the low hundreds."
Worse, the cash gifts won't be repeated ad infinitum: "The allowances will be subject to review after a few years," Terry said.
Investment bankers hoping for a big increase in salaries stand to have their hopes trampled. Salaries will not be increased. What's coming will be more like a one-off gift from a benevolent uncle who might have second thoughts when it comes to opening his wallet again next year.