With culls taking place across the street, it is a brave new world for out-of-work bankers. But beneath the headline numbers, there have been meaningful changes to pay packages, which have contributed to the predicament that many investment banks now find themselves in: high fixed costs combined with slowing deal flow.
“Post-2008, there has been a material shift in investment banking compensation, principally as a result of the backlash from governments and regulators in respect of the size of bonuses awarded by the industry pre Lehman,” said Simon Roberts, managing director at recruitment firm Sheffield Haworth in Hong Kong.
“The result was that banks substantially increased base salaries, but in so doing, they increased their fixed cost base, which may have been fine going into 2010 when the market recovered fairly sharply, but it didn`t look so clever going into the second half of 2011 and beyond, as markets began to reel from the impact of the European sovereign debt crisis.”
According to one senior banker, fixed salaries for investment bankers have risen meaningfully. Where in the past banks could reduce bonuses in tough times, now they are forced to fire.
“The ratio of fixed salary to bonus is very different from what it was before,” he said. “Before, bankers were paid a comparatively low salary and the bonus was a significant portion. Now, that has changed quite meaningfully. The fixed salary is about 50% of the total compensation. On average, the fixed salary has nearly doubled. In an environment like this, it is not very helpful.”
Asia ex-Japan dollar bond volumes have hit historic highs this year, but equity and M&A volumes, which traditionally have paid most of the bills at investment banks in Asia, have slowed. According to Dealogic, year-to-date total debt volumes for the region stand at $523 billion, up sharply from the $362 billion for the same period last year. However, in contrast, total equity and Asia-ex Japan targeted M&A deal volume stand at $104 billion and $265 billion, down from $128 billion and $281 billion for the same period last year.
The amount paid out to senior investment bankers fell sharply for the financial year 2011 compared to the previous year. According to Roberts, in broad-brush numbers, senior managing directors at the top investment banks were paid total compensation in the region of between $2.5 million to $6.5 million in 2010. In 2011, this range declined sharply to about $1 million to $2.5 million. Ouch. That’s hardly small change — more, in fact, than many people earn in a lifetime — but nonetheless, it is a precipitous drop, especially if you’re intent on keeping up with the Joneses.
For junior managing directors, the total compensation might have been somewhere in the region of $1 million to $2.5 million in 2010, reducing to the region of $800,000 to $1.5 million in 2011. At a number of banks this year, zero bonuses were paid out for 2011, Roberts added.
And it is still the case that fees are under compression, the industry is overbanked and deal flow is down, which means that pay packages are expected to fall further this year and more culls are expected.
“If I look out into next year, total compensation is going to come down further and the reason is that investment banking in Asia is not making the return it needs to make in terms of return on capital. I would think banks will pay substantially down next year on 2011,” said Roberts.
“Any bank will always seek to reward its key performers in order to retain them, but at the same time the cost-to-income ratios of the majority of banks are unsustainably high given likely ongoing market conditions and, unless banks are going to be brave enough to re-adjust base salaries downwards, the only lever they have left to pull is headcount. It’s inevitable that they will shrink their businesses further.”
For out-of-work bankers, the prospects are not rosy. “At this point in the year, the hiring window for the majority of banks is effectively closed. This year has been notable for the relatively low level of hiring and in any event from a commercial perspective it makes sense to fill roles with internal candidates if at all possible,” said Roberts.
Anyone jumping ship these days is unlikely to get the hefty sign-on bonuses seen in previous years as new FSA requirements effectively put a cap on the bonuses that banks can pay to bring new candidates on board and, with the majority of bulge bracket banks looking top heavy, there is less of a need to bend over backwards to retain staff.
“From a compensation perspective, the goal posts are being moved quite dramatically,” said Roberts. “Two-year bonus guarantees are a thing of the past, and while premiums are still being paid for China or Indonesia bankers with strong client connectivity, most banks are taking more of a hard-line approach.”
Pay packages have changed in other ways as well. While not uniformly implemented at banks across the street, deferred bonuses and bonus claw-backs are becoming more common features. In addition, more stock is being paid out and the vesting period is drawn out over a longer period of time. Bonus claw-backs, which allow banks to take back bonuses amid special circumstances, are aimed at discouraging excessive risk-taking.
This, some argue, is not a bad thing. “If a banker knows he is going to get all his money and nothing is going to happen, he might push a trade, whereas now, he knows there is something the bank can do and might be more careful, which isn’t a bad thing,” said another senior banker. “That’s not a bad deterrent. It keeps people more honest.”