Cut through the outrage – and the real story behind this year’s bonus season is how quickly pay and bonuses are falling
It is difficult to feel sorry for investment bankers and traders. But if you are ever going to feel any sympathy for them, then this year would be a good time to start. For all the noise and (often synthetic) outrage over their pay and bonuses, the reality is that pay is coming down across the industry faster than is immediately clear.
The big problem is that it doesn’t look like this is happening. As the chart below shows, reported compensation at the big investment banks which disclose it looks stubbornly resistant to gravity. Despite a fall in pretax profits last year of 51% across the industry, the average fall in compensation last year was only 9%.
Cue social and political outrage – particularly over banks like the institutional securities division of Morgan Stanley, at which compensation in 2011 actually increased last year (despite an 85% fall in pretax profits).
The problem with this reported figure is that while it is often confused with “pay”, it is not the same thing at all. A large chunk of the reported compensation is the payment of deferred bonuses from previous years, which distorts the figures. It also includes salaries, spot bonuses (payable immediately) and social security, but doesn’t include bonuses awarded for last year that have been deferred into future years (when they will wreak havoc with that year’s accounts).
You get a better picture of what is happening to pay at investment banks when you look at what has happened to the size of the bonus pools for last year. A few weeks ago, a report from the Office of the New York State Comptroller was widely (mis)reported as showing that banks on Wall St had only cut their bonus pools by 14%. But that report was only talking about cash bonuses and ignored the increasing proportion of bonuses that are paid in deferred cash or stock. A quick trawl through the earnings presentations and analyst calls by the big banks shows a very different picture, shown in the chart below:
Far from falling by just 14%, the bonuses for last year at investment banks fell by an average of 42% (or perhaps slightly less than this when you weight the banks by the size of their wallets). At many of the European banks, around 50% of the bonus pool evaporated last year.
If you assume that bonuses account for roughly half of annual pay across the board at investment banks, a 50% cut in your bonus adds up to a 25% cut in your overall package.
…and drags down total comp
Unfortunately, none of the banks publish numbers that explain what happened last year to overall remuneration (here’s why they should), but some do give a glimpse. In the UK, big banks have to disclose the awarded compensation to their so-called “code staff” – senior managers and “material risk takers”, which helps give an indication of what happened to total pay last year. Other banks give coy guidance as to what happened to “total comp” last year, as shown in this chart:
This suggests that total compensation fell by 25% last year, albeit across a small sample. But that tallies with what many bankers and traders are saying.
Note that this 25% fall in total compensation is the second year in a row when comp has fallen. Last year the numbers were down by between 15% and 20% at many banks. On this basis, overall pay is down by around 40% on where it was in 2009. That may not be fast enough for some people, but it almost certainly a lot faster and deeper than the decline in pay in any other industry.
Investment banking – as Jamie Dimon said recently – is never going to be a low paying industry. Investment bankers and traders are unlikely to be struggling to pay the gas bill anytime soon, even if some of them showed a remarkable lack of awareness in sharing their concerns over bonuses with Bloomberg recently.
But at least pay is coming down, and faster than at first appears. The real challenge for Wall St will be whether it can keep the lid on pay and bonuses if and when things recover.