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Morning Coffee: One bank is paying juniors 30% more than all the rest – here’s why. New beginning for Deutsche Bank?

If you're looking for a bank where second and third year analysts are “unusually satisfied with their variable compensation,” try Citigroup. So says research from recruiters Dartmouth Partners. This year second year analysts there apparently received average total comp of £130k ($167k) and third years got £158k ($203k). This compared to industry averages of less than £100k and £123k respectively for 2018.

Exciting. But is there a catch?

Kind of. The reason why Citi juniors did so well this year is that they effectively got two bonuses.  Citigroup decided to shift its junior bankers’ compensation year from a January to an August payout (calendar year to anniversary-of-joining), so there was a short compensation cycle.  In future, Citi's juniors will not be included in the bank’s January performance round, so things will be back to normal.

Cynics, however, will suspect that this move wasn’t made purely out of kindness: Citigroup gets significant strategic benefits from the move.  Previously, Citi was unusual among U.S.-owned banks in having a January pay year for juniors. Moving to the same calendar as Goldman Sachs and Morgan Stanley will allow Citi to play banks’ game of jockeying to be slightly later paying than the competition to gain an idea of the market norm – the European-owned banks often set bonus dates stretching into February or even March, which allows them to calibrate the amounts based on the January round of Wall Street, at the price of a considerable loss of kudos for implicitly admitting that they’re always price takers.

Equally importantly, the August compensation date has an important role in the retention of third year analysts.  This is a crucial stage in the life cycle of an investment banker: it\'s is the time when good analysts graduate from the program and are therefore capable of doing genuine value-added work.  But given the lack of differentiation in the analyst bonus pool compared to associates and higher grades, the best third-years are often quite significantly underpaid for the work they’re capable of.  And so they’re potentially vulnerable to being poached.

The problem, if you're a third year analyst who's unhappy with your August bonuses is that you're stuck. Banks promote in January and if you move after your bonus is paid it's almost impossible to arrive in your new place in time to be promoted. However, if you're an analyst who gets paid in January you have more time to consider your options. - You can easily go through the recruitment process for a new banking job, take a month's gardening leave, and still show up in plenty of time for at least a token payment in your new firm’s August remuneration cycle, without pausing in your progress up the ranks. An August bonus round is therefore a defence mechanism for banks that want to stop this happening. Citi isn't paying two bonuses for nothing.

Deutsche Bank, meanwhile, receives another downgrade in terms of bragging rights, as Reuters has now seen documents which confirm what has long been suspected based on its market capitalisation – the bank’s shares are to leave Europe’s blue-chip STOXX50 index.  A sad day in some ways, but it might be for the best.  The relationship between Deutsche Bank and its shareholders has been unhealthy for some time, and outside the index, it is more likely to find an investor base which are holding the stock because they want it, and who are prepared to do research into a complicated company, rather than an investor base largely made up of non-specialist fund managers who hate the stock but feel like they can’t depart too far from the index.  As Juergen Fitschen admitted in Handelsblatt this week, a lot of Deutsche’s problems today stem from its reluctance to raise equity in the past, and that wasn’t purely down to management stubbornness on the part of Fitschen, Josef Ackermann and Anshu Jain; the shareholder base have to take some of the responsibility too.

With a more involved and informed investor base (including, presumably Cerberus and any other activists), Deutsche’s Christian Sewing will be able to plan for the future and think about the appropriate size of its capital base in a calmer environment, a little more removed from the public eye.  And it might even be good news for staff too.  Deutsche’s balance sheet, league table rankings and even earnings are not so very different from how it was in 2013, when the market capitalisation was roughly twice what it is today.  Now that most of the shareholder dilution is in the past, it might not be such a bad time to be pricing a brand new set of DBK stock options.


Surprise! David Solomon is still popping up to do surprise DJ sets at clubs in the Hamptons.  Young and trendy Goldman Sachs employees boldly went on the record as saying that their CEO was fantastic and had opened their eyes to whole new music styles.  In fairness, the set apparently also went down a storm with people who do not look to DJ D-Sol for their year’s compensation, and don’t have to justify to him why they were in a nightclub at the weekend rather than working on deals.  (Bloomberg)

With the countdown for Kweku Adoboli’s deportation to Ghana now reaching the critical stages, there’s a petition to the Home Office to let him stay and act as a “living case study” (38 Degrees)

And on the same subject, a “where are they now” piece on the other 11 UBS bankers who were fired as a result of the Adoboli rogue trader scandal, including Carsten Kengeter (resigned from Deutsche Boerse), Ossie Gruebel (retired) and several more junior ranks.  Most still work in finance, one could not be traced and one set up a gambling site called “Bets With Mates”. (Bloomberg)

Gary Cohn, formerly of Goldman Sachs, makes an appearance in the published extracts from Bob Woodward’s new book on the Trump White House.  Apparently, among other exploits, he stopped the USA from leaving both NAFTA and a South Korean trade agreement, by stealing letters off the President’s desk and waiting until he had forgotten about them. (Washington Post)

The key job move news of the day concerns the reorganisation at Citi caused by the retirement of CFO John Gerspach.  Mark Mason steps up from CFO of the investment bank to the group role, while Jim Cowles (head of EMEA) and Bill Mills (CEO of North America) are leaving the bank.  No successors announced, but the company emphasised that the EMEA head’s job would still be located in London.  (Financial Times)

Citi has hired Gordon Ball to be head of EMEA listed derivatives electronic execution and algo, and Joseph Michniowski to the corresponding job in Asia, both hires coming from GS. (Financial News)

John Gousias, who left HSBC for Millennium Capital in 2017, has gone to Nomura to be head of flow trading credit. (Bloomberg)

And Nikolas Skaff, an equity capital markets MD covering emerging EMEA has moved to JP Morgan, bringing Ismail Iraqi, a VP on the same team, with him.  (Financial News)

A hedge fund which was among the creditors in the Toys-R-Us bankruptcy is now being asked by redundant workers to contribute to the hardship fund.  The workers are approaching the New Jersey public investment fund to put investor pressure on the hedge fund.  One of the costs of taking public sector money is that you enter the world of politics.  (FT)

A team of private bankers who moved from JP Morgan to Merrill are being sued for “bad mouthing” their former employer.  (Financial Planning)

Millennials are learning German in increasing numbers, seeing it as potentially a business language of the future.  (Guardian)

And an excellent think piece on the difference between designing a profitable trading system, versus actually trading it properly.  (Cuemacro)

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AUTHORDaniel Davies Insider Comment

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