2015 investment banking bonuses, the outlook by bank
As the end of the year approaches, so the talk about bonuses is becoming more urgent. If that talk is right, the big U.S. banks are going to be paying well and the big European banks are going to be paying badly.
Or are they? Headhunters in London suggest that Morgan Stanley's alleged decision to dump 25% of its fixed income traders before bonus time could be a game-changer. "It's still all speculation at this stage," says one senior fixed income headhunter. "Even if bonus pools have been allocated, they might be cut again. You have Credit Suisse, Deutsche and Morgan Stanley letting people onto the market and that's going to push pay down. It would be irresponsible for banks not to cut bonuses accordingly."
"Most people are saying the bonus pools are going to be down between 10% and 20%," says another headhunter. "Even if you've performed, the best you can probably expect is flat."
That's the general outlook. Here's what to expect bank by bank.
Barclays:
What's been said:
New CEO Jes Staley only arrived at Barclays yesterday, so it's too early for him to say anything about bonuses yet. However, Barclays' chairman John McFarlane (who hired Staley) said in October that he thinks bonuses are a bad way of rewarding bankers and that pay in the industry is still too high. Bonuses for markets professionals should ideally be withheld for, "three or five years" said McFarlane - that way you can see what kind of "value they have created."
This might suggest that Barclays will be implementing longer deferrals this year. However, McFarlane also said Barclays can't change bonus deferrals unilaterally and that it can't pay below the market price.
The reality:
Barclays doesn't break out pay figures for its investment bankers in its quarterly reports. Last year, however, Barclays spent £3.6bn compensating its investment banking employees (deferred bonuses included) and made total income in the investment bank of £7.6bn - a compensation ratio of 48%.
In 2015, revenues at Barclays' investment bank were up 3% in the first nine months of the year compared to the same period of 2014. This might suggest bonuses at the bank could even rise. However, some businesses at Barclays have done far better than others - lending and macro trading have outperformed this year, while credit trading revenues are down 11%. If anyone gets paid up at Barclays, credit traders are unlikely to be included.
The structure last year:
Last year, bonuses over £65k for junior and mid-ranking staff at Barclays were deferred on a sliding scale over a three year period. However, in a continuation of a policy introduced several years earlier, 100% of all bonuses over £250k were deferred, and managing directors had 100% of their bonuses deferred for up to three years.
Bank of America:
What's been said:
Brian Moynihan has stayed schtum over the prospects for bonuses at Bank of America.
The reality:
In the first nine months of 2015, global investment banking fees at Bank of America declined 5% compared to the same period the year before. Sales and trading revenues fell by 3%, with a 9% drop in fixed income. Within fixed income, credit-related businesses again had a bad third quarter.
If compensation is held constant as a proportion of revenues, it therefore looks like Bank of America's bonus pool will be down anything between 3% and 5%, with a bigger reduction in credit. Last year, Bank of America cut bonuses for its rates traders by 15% to 20%. Rates traders had a good third quarter, and will be hoping this isn't repeated.
The structure last year:
Bonuses at Bank of America vest over a three year period. In 2012, Bank of America restricted cash bonuses to $150k maximum for some of its investment bankers, but it's not clear whether this was implemented last year too. BofA hiked European managing director salaries to $500k in February 2014 to avoid the EU bonus cap. Two years later, its staff might think they deserve another raise.
Citi:
What's been said:
Bloomberg reports that - all things being equal until the end of the year - Citigroup will be leaving its bonus pool unchanged from 2014. However, it also notes that Citi said much the same thing this time last year and then proceeded to cut pay for fixed income and equities traders after a difficult December.
The reality:
Citi pays around 27% to 29% of the revenues in its Institutional Clients Group in compensation. In the first nine months of 2015, investment banking revenues (ECM, DCM and M&A advisory) revenues at Citi fell by a combined 6%, with a massive 30% decline in equity capital markets (ECM) and a 16% increase in advisory. In investment banking, therefore, ECM bankers are likely to be paid down and Citi's M&A bankers might be paid flat as their revenues are used to cross-subsidize bonuses for any ECM staff the bank wants to retain.,
Across sales and trading, revenues at Citi were down 3% year-on-year in the first nine months, with a 9% reduction in fixed income.
The structure last year
Citi has a reputation for paying a high proportion of its bonuses in cash. In January 2014 it announced that it was paying at least half of its bonuses in Europe as cash, that bonuses up to $100k would be wholly paid in cash, that bonuses up to $499k would be 75% cash and that bonuses up to $3.9m would be 60% cash. Deferrals at Citi seem to last four years in total, however, which is longer than most US rivals.
Credit Suisse
What's been said:
Without citing its sources, The Sunday Times reported last weekend that bonuses at Credit Suisse's investment bank could fall by up to 60%.
The reality:
New CEO Tidjane Thiam is making 30% of Credit Suisse's London investment banking employees redundant, and has said that Credit Suisse's investment bankers are only there to support its private bankers. Accrued pay per head at Credit Suisse's investment bank was CHF208k ($210k) in the first nine months of this year, down from CHF222k in the first nine months of 2014. If Credit Suisse is planning to cut its investment banking bonus pool that significantly, it will have to make some dramatic changes in the final quarter.
The structure last year:
Credit Suisse usually offers comparatively short (three year) deferrals compared to other banks, and only begins deferring bonuses above $250k.
Deutsche Bank:
What's been said:
If the indications are anything to go by, bonuses at Deutsche Bank will not be good this year. In October, Bloomberg suggested that Deutsche will suggest its 2015 bonus pool by a third compared to last year. Late last month, new Deutsche CEO John Cryan also said bankers are paid too much and that he considers bonuses ineffective as a means of motivating people.
The reality:
In the first nine months of 2015, pay per head across Deutsche's corporate banking and securities unit (which includes corporate bankers) fell 5% to €110k ($116k).
The structure last year:
Deutsche Bank's deferrals typically vest over three years. However, 139 of the bank's most senior managers have their bonuses subject to a 4.5 year 'cliff vesting' schedule and don't receive anything at all until that's over. In the past, deferrals at Deutsche Bank worked as follows: at least 50% of all bonuses above €100k were deferred, with exactly 50% deferred between €100k and €200k, rising to 75% between €200k and €500k, and 75% for bonuses of between €500k and €1m. Above €1m, all bonuses at Deutsche Bank were deferred and Deutsche didn't pay a cash bonus of more than €300k in a single year, meaning that once the €300k cash threshold was met Deutsche paid all bonuses in deferred stock anyway.
Goldman Sachs:
What's been said:
Goldman Sachs hasn't said anything about its bonus plans for 2015. However, the bank has publicly said that it prefers to cut pay than to cut headcount. After a tough third quarter, smaller bonuses therefore look likely.
The reality:
In the first three quarters of 2015, Goldman accrued $288k in compensation per employee. This was down from $320k in the same period of 2014. All things being equal in the final quarter, the Goldman bonus pool is therefore likely to fall by 10% this year.
The structure last year:
Like most US banks, Goldman Sachs defers its bonuses for three years. However, senior staff are required to retain a 'material proportion' of restricted stock units for up to five years. On the whole a high proportion of Goldman Sachs bonuses are typically paid in cash.
J.P. Morgan:
What's been said:
Bloomberg reported this week that the bonus pool at J.P. Morgan will be "unchanged" for the bank's traders and investment bankers this year.
The reality:
J.P. Morgan no longer breaks out how much it pays its investment banking staff and bundles their pay in with that of its corporate bankers. Based upon revenues alone, therefore, it looks like J.P. Morgan's M&A bankers should be in for bumper bonuses this year - their revenues were up 27% in the first nine months. Equities traders also look likely to do well - their revenues were up 19%. However, bonuses are likely to be cut for fixed income traders (down 12%) and for JPM's ECM bankers (down 10%). Recruiters in London say some people on J.P. Morgan's rates desks have had a particularly bad year.
The structure last year:
Historically, bonuses at J.P. Morgan vest over three years, with vesting skewed towards years two and three (50% in each). Below $250k, headhunters say J.P. Morgan's bonuses are almost entirely paid in cash.
Morgan Stanley:
What's been said:
Unusually perhaps, Morgan Stanley CEO James Gorman hasn't said anything damning about bonuses this year. In the past, Gorman has said that bankers are overpaid and that Morgan Stanley bankers who don't like their bonuses can leave.
The reality:
Morgan Stanley is reportedly making 25% of staff in its fixed income sales and trading business redundant. Irrespective of the bank's performance, this clearly doesn't augur well for bonuses all-round, but in fixed income especially.
The structure last year:
Morgan Stanley's bonuses usually vest over three to four years. In December 2014, the bank made the decision to pay a greater proportion of its bonuses in cash, and cut the average deferral from 80% to 50% of the total.
UBS:
What's been said:
UBS has also been strangely silent on the subject of bonuses for 2015.
The reality:
Compensation figures per head from UBS's investment bank suggest it's paying really quite phenomenally well. However, insiders suggest this might be because UBS doesn't include all its back office staff in its investment banking headcount numbers. Either way, UBS's fixed income salespeople and traders definitely deserve to be well-rewarded after achieving a 37% increase in revenues in a declining market.
The structure last year:
Deferred stock at UBS typically vests two to three years after it was awarded. However, in the past it was the case that any UBS banker earning more than CHF300k had his/her bonus deferred over a full five year period. More generously, all bonuses below $300k were historically paid in cash.
Photo credit: "2003 Dom Perignon Champagne" by Dale Cruse is licensed under CC BY 2.0
