Are you overpaid? What's the likelihood that the level of pay associated with your particular finance job will rise in the next four years? Or is the decline endemic?
Based upon a) history, b) informed predictions, and c) banks' very own pronouncements, we've devised the following methodology for working out how your compensation is likely to evolve in the medium term.
Guess what? It's mostly bad news.
1. Do you work in New York City? Add 5%
Working in New York City is a boon to your banking pay. As the chart below, provided by the New York State Comptroller, shows, average salaries (defined here as salaries and bonuses) in NYC have been rising. In 2014, they exceeded $400k (£277k) for the first time since the financial crisis.
Source: New York State Comptroller
These days, there are no comparable figures for average finance compensation in London or Singapore and Hong Kong. Anecdotally, however, the overall direction of pay in both London and Singapore and Hong Kong is flat to down.
2. Do you work for an investment bank? Deduct 5%
If you work for an investment bank (as opposed to a hedge fund, asset management firm, brokerage, or boutique), your pay will be under pressure. The chart below, taken from think-tank New Financial, shows average compensation per head in investment banks falling 8% in the four years between 2010 and 2014. With banks under continued pressure to cuts costs, another 5% reduction (at least) seems likely between now and 2020.
Source: New Financial
3. Do you have one to three years' experience? Add 5%. Do you have five to seven years experience? Add 3%. Do you have more than seven years' experience? Deduct 10%
Despite the seeming glut of juniors in M&A, the latest pay report from London-based search firm Dartmouth Partners shows compensation increasing in 2016 for investment banking division (IBD) professionals with one to three years' experience. As banks struggle to recruit and retain juniors, further marginal pay increases are likely for the most junior staff in future.
Similarly, banks can be expected to pay more in future (if not in the past) to the experienced associates and junior VPs who are benefiting from the so-called "juniorization" trend as banks seek to shift work away from experienced senior staff towards cheaper, experienced, mid-rankers.
Beyond junior VP, however, the direction of travel is negative. As Deutsche Bank's 'bonus tax' on newly-promoted managing directors illustrates, senior staff today are expected to take a pay hit so that juniors can be paid up. Bad luck. This trend is likely to continue.
Source: Dartmouth Partners
4. Do you work in a front office markets role? Deduct 5%. Do you work in an infrastructure-related markets role? Add 5%.
If you work in either sales or trading, your pay is in for a squeeze. In both areas, profitability is being eroded as banks invest heavily in the technology and control functions they need to function in today's markets.
As the chart below, taken from the most recent report by Morgan Stanley and Oliver Wyman, control costs per head have increased by 50% since 2010, to an average of $300m. If you work in sales and trading, you therefore now need to generate $300m in revenues simply to break even. The pace of increase in control costs is likely to moderate in the next four years, but will continue to exert a drag on pay.
By comparison, compensation per head in infrastructure roles - particularly those related to risk and compliance has the potential to continue rising. Recruitment firm Morgan McKinley regularly cites average salary increases in excess of 10% for the support staff it places. However, infrastructure pay rises are likely to be moderated in future as banks try very hard to get a handle on costs.
Source: Morgan Stanley and Oliver Wyman
5. Are you working for a market leader in the top 5? Add 5%. Are you working for a wannabe player outside the top 5? Deduct 3%
Banking is becoming a game of winner takes all, particularly in sales and trading. As analysts at both J.P. Morgan and Morgan Stanley have pointed out, revenues in both equities and fixed income sales and trading are converging around the top five banks in equities and FICC.
As the following chart from Morgan Stanley shows, the market leaders in equities trading are far more profitable than the rest. The top five firms can afford to pay. The rest, cannot.
Source: Morgan Stanley and Oliver Wyman
6. Are you a producer? Add 10%
Irrespective of the cost squeeze, if you're a key person who brings in clients and keeps them happy, you're going to get paid.
As Deutsche Bank made clear in last year's strategy presentation, 30% of its clients now generate 80% of its revenues. Citigroup's equities analysts have classified clients into a three-tired hierarchy of “supercore,” “core” and “base.”
If you're on good terms with the 30% of supercore clients who generate most of the revenues, you're going to get paid. If you're not, you'll probably lose your job.
7. Are you working for a European bank? Deduct 3%
Working for a European bank is bad for your pay. Deutsche Bank, Credit Suisse, Barclays and RBS especially all have significant cost saving programmes underway. U.S. banks like Bank of America are cutting costs too but are generally more efficient than European rivals. Margins everywhere are tight: in Bank of America's markets business, cost accounted for 83% of revenues in 2015. At Credit Suisse's global markets business, costs exceeded revenues by CHF2bn.
8. Are you in a shrinking business area? Deduct 5%
If analysts at Morgan Stanley and Oliver Wyman are right, there are no growth areas in investment banking right now. There are only flat areas and areas of rapidly reducing revenues. Your best bet is to work in FX sales and trading, or in prime brokerage and exchange traded derivatives. Your worst bet is to work in equity capital markets, equity derivatives, credit or securitized products.
The charts below show the analysts' revenue predictions by product.
Conclusion: You could benefit from a 20%+ pay rise, but you're more likely to suffer a 30% pay cut
If you're in the right place, working for the right firm, with the right clients, in the right market, we suggest therefore that could see your pay increase by around 20% on a like-for-like basis in the next four years (clearly you can't be a producer and in an infrastructure role, so you won't get both these benefits).
In reality, however, the compensation associated with your role is more than likely to fall. In the worst case scenario (European bank, credit, highly experienced), it could fall by 30% - assuming (of course) that you still have a job when 2020 arrives.
Photo credit: Gypsy_fortune_teller by Silverisdead is licensed under CC BY 2.0.