Bad luck if you're a contractor in an investment bank. As banks cast about for ways of cutting costs, contractor pay is the equivalent of an eye-level peach - it would be a crime to leave it on the tree.
HSBC has just 'ordered' its contractors to take a 10% pay cut and a two week holiday (unpaid), and it's not the only one. In September, Bank of America commanded all the contractors at its Charlotte head office to take identical medicine, a move which it replicated in London in a couple of weeks later. RBS, Barclays and HSBC also each foisted pay cuts upon their contractors last year.
Cuts to contractor pay are as inexorable as endless rounds of quantitative easing.
While contractors find themselves hammered by cost-cutting initiatives, however, full-time employees in front office investment banking jobs have been the beneficiaries of salary rises. As we've reported, most banks have hiked salaries for front office staff in IBD (investment banking division) or sales and trading roles in 2015. At Morgan Stanley, in particular, all VP level staff in M&A are said to be on at least £175k ($270k). At Barclays investment bank, recruiters say London-based third year analysts in IBD are now on £65k, well above the market average of £60k, and up from £57k in 2014.
The most interesting evolution in pay, however, is at the most senior end of the banking spectrum. This year and last, senior VPs and managing directors in investment banks in London have been the recipients of large 'role-based allowances' introduced to help sidestep the European Union's bonus cap.
These allowances are far from being inconsequential. Tom King, chief executive of Barclays investment bank, received a role based allowance of £624k for 2015, for example, up from £600k last year. "I've seen quite a few MDs who are on base salaries of £350k and who get a role based allowance of £200k", says one M&A headhunter, speaking on condition of anonymity. "All in, their fixed pay is therefore more than half a million."
The question being asked now in the executive dining rooms and Starbucks of the City of London, is whether allowances will be replicated in 2016. In October 2014, the European Banking Authority tightened its guidelines on the issue and the UK Financial Conduct Authority has promised to implement the new rules from 2016. As of next year, allowances paid to senior bankers can't be changed from year to year and must be matched to a role rather than an employee. Allowances are expected to be cut as a result.
If this happens, headhunters say senior bankers are expecting their salaries to rise. "There's a lot of chatter and nervousness about it," says one. "The expectation is that allowances will see a bit of trimming and salaries will increase to match," says another.
If fixed pay for front office bankers increases (again), guess who's likely to get squeezed? That's right. "It's incredibly difficult to cut the pay for permanent staff without getting them to sign new contracts," says one recruiter. Contractors, on the other hand, are compelled to sign new contracts regularly.
Permanent staff shouldn't be too complacent, though. "As fixed staff costs keep rising, employees could find themselves in an exposed position when markets turn," says Logan Naidu, chief executive of financial services recruitment firm Dartmouth Partners. "At some point, banks could be faced with the decision of cutting staff or cutting pay."