Proof that European bankers are the most unhinged. Realism hits Wall Street
Despite a difficult third quarter for most bulge bracket firms, investment bankers are generally optimistic that a solid first half in 2013, combined with their own personal performance, will be enough to produce an increase in their bonus payments this year.
UK bankers are among the most hopeful that bonuses will be on the up this year, with 58% of respondents to a global survey of over 4,600 financial professionals by eFinancialCareers expecting an increase. Meanwhile, Wall Street workers have tapered their expectations, with just 42% anticipating a rise, compared to an average of 53% across the Asia-Pacific region.
There’s no doubting revenues have improved in 2013, despite a tough Q3 for most bulge bracket banks, but it still seems unlikely that bonuses will significantly improve. In the latest round of quarterly reporting, most banks have hinted that compensation will be curtailed.
Buried in JPMorgan’s report, for instance, was the fact that it had cut pay for investment bankers pay by 15% year-on-year in 2013, despite only a 2% drop in revenue in the division, while Goldman Sachs’ compensation pool has fallen by 5% for the first nine months of this year, and by 35% in Q3 compared to the same period in 2012. Citi, meanwhile, said that it had reduced compensation and headcount in its securities and markets division after a 29% decline in profits during the third quarter.
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In fact, after the post-summer optimism, experts are starting to revise their predictions for compensation downwards. In September, Alan Johnson, founder of compensation-consulting firm Johnson Associates, told us that he expected bonuses to be up by 5-10% across the board. Now, he believes that variable compensation for those in the fixed income, currencies and commodities (FICC) divisions of investment banks – particularly bond traders, which have suffered in recent months – will drop by 10-15%, and many could be in for zero bonuses.
Jon Terry, a partner in the reward and compensation practice at PwC, says that most banks – particularly in Europe – are making a concerted effort to reduce their compensation ratios, and the surge in litigation and legal costs (particularly those at JPMorgan) will ultimately impact banks’ ability to pay large bonuses.
“If we discount these factors and focus purely on company performance, I’d expect small increases in bonuses in Asia and the US – no more than 10% - and flat or reduced compensation in Europe,” he said.
It’s therefore even more surprising that those in Europe should be expecting an increase, particularly as the EMEA divisions of investment banks have continued to perform poorly. Citi’s revenues slipped by 56% in this region, while JP Morgan’s fell by 14% on the second quarter.
However, our bonus survey suggests that most people are at least expecting a modest increase. The largest proportion of people in each region were anticipating an uptick of 0-10%. Again, UK respondents the most optimistic with 20% saying they expected this increase, followed by Hong Kong and Singapore (both 19%), the US (17%) and the Gulf region (14%).
While company performance was cited as a significant driver for bonus uplift this year, with a global average of 24% of respondents saying it was the primary reason for an expected increase, most people were anticipating a rise because of personal performance. 50% of respondents in Australia said that their own performance would lead to an increase on bonus payments, compared to 41% in the Gulf, 40% in the UK, 36% in Hong Kong, 35% in the U.S. and 34% in Singapore.
“It’s in investment bankers’ nature to assume that good personal performance will result in a bigger bonus. Pre-financial crisis I would have agreed with this, but there’s an increasing disconnect between what someone believes they should be paid based on their performance, and the ability of institutions to hand out big bonuses to individuals while curtailing the bonus pool overall,” said Terry.
Investment banks have been increasing salaries, particularly in Europe where the EU bonus cap is set to limit variable pay to no more than 200% of base pay. This is reflected in the eFinancialCareers survey – an average of 59% of respondents globally saw a change in their base pay, and 88% of these received an uplift. The largest proportion of survey respondents (22-27%, depending on region) were on the receiving end of relatively hefty rises of 11-30%.
While in the short term, this will be seen as a boon for investment bankers, it ultimately removes firms’ ability to cut the bonus pool in difficult periods. Analysts have pointed out that if volumes remain low enough for long enough, more redundancies seem inevitable.
To view the eFinancialCareers bonus expectation survey results as an infographic click on the links below:
