Charts confirm supremacy of investment banking pay, but there’s a problem
If you want to earn big money, you don't want to work in asset management or retail banking. A new report from the European Banking Authority reveals that regulated investment bankers earn far more than regulated retail bankers and regulated asset managers.
Retail bankers are the most impoverished line of the banking family tree. In 2012 (the most recent year for which data is available) investment bankers earned nearly as three times as retail bankers according to the chart below. Investment bankers also received far higher bonuses than anyone else, even though bonuses in investment banking have been diminishing year-by-year.
Pay for regulated investment bankers, retail bankers and asset managers
However, the investment banking pay parade is about to be rained upon. As everyone knows, investment banks have introduced 'role-based allowances' in an attempt to sidestep the European Union's bonus cap, which says they can't pay regulated staff more than 100% (or 250% at a push) of salaries in the form of bonuses. And as we reported last month, these role based allowances have turned out to be a great thing for bankers in Europe. All of a sudden, they're getting their salaries, their deferred bonuses and some role based allowances which are payable entirely in cash.
However, the European Banking Authority (EBA) is onto the fixed allowances ruse. In a preface to today's report, the EBA said it's, "currently analysing this emerging practice and will set guidance criteria to correctly assign these elements to either variable or fixed remuneration, so as to ensure that these practices do not lead to a circumvention of the newly introduced cap between the variable and fixed component of remuneration."
What will this mean for banks? And what will it mean for the employees of European banks all over the world who've been enjoying the new allowances regime?
How banks will keep their role-based allowances, or something similar
Compensation lawyers say the EU's sabre-rattling is no big deal.
"A lot of thought has already gone into this," says one London-based lawyer who asked not to be named as she works with banking clients. "Allowances have been structured specifically so that banks can argue that they're fixed pay and don't constitute a form of bonus."
She says the most legally robust allowances are those which are attached to roles rather than to people: "As long as you're working in a particular role, you will get that allowance." Under this definition, banks can still modify allowances, but only if roles are modified too.
By comparison, she says the most legally precarious allowances are those which allow banks to modify, reduce, or withdraw them without reference to the actual role. These look a lot like bonuses by another name, and are likely to be outlawed by the EBA when it issues its new 'guidance criteria.'
Sam Whitaker, a counsel in the executive compensation & employee benefits practice of the London office of Shearman & Sterling, says banks are also looking at alternatives to allowances. These include frequent renegotiation of salary contracts to allow salaries to rise and fall according to the business climate, or temporary payments made to bankers who enter into punitive 'restrictive covenant' agreements stating that they can't work for a competitor after they leave.
EU compensation rules are a side-issue anyway
However, in all the fuss surrounding the EU's compensation rules, it's worth remembering just how few bankers they actually affect. Only 4.4% of investment banking staff are regulated by the EU's new pay guidelines. In asset management, fewer than 1% of staff are.