A few days before the start of the annual season of bonus baiting, here is a quick look at one of the few ‘known knowns’ in the debate over pay: what investment banks pay their senior staff in the UK.
Nearly a year ago, I wrote that it might be a little awkward – embarrassing, even – if it turned out that pay for the most senior staff at investment banks was going up, even as overall pay across the board was falling.
That conclusion was based on filings by European banks showing what they paid to their most senior staff in 2012. In the past few weeks, the big US investment banks have filed the same disclosures, and they appear to confirm that original thesis:
‘…In other words, banks are being more discerning about how they pay bonuses. Good performers – people who make more money for the bank than you might expect for someone sitting in their place – are getting proportionately more.
Mediocre performers and middle level staff, who are useful for heavy lifting but are eminently replaceable, are getting proportionately less. Juniors or bad performers are getting nothing. This is, of course, exactly as it should be…’
Here are five charts that tell you everything you ever wanted to know about pay for senior staff at European and US investment banks in the UK:
1) How much…?
Senior staff at investment banks are not struggling to pay the gas bill: there is no such thing as an average senior banker (ask them: they all say they’re way above average), but the 2,138 most senior senior staff (or ‘code staff’) in the UK at a sample of 11 banks earned an average of $2.05m in 2012 (that’s about £1.3m). Their average fixed pay was $506,000 and their average bonus was three times that at $1.54m.
There is a surprisingly wide variation in what different banks pay their top staff in the UK. This chart shows the total pay for the most senior employees at US and European banks in 2012 (in millions of dollars and with the number of staff included):
The top 115 staff at Goldman Sachs received an average of $4.7m in 2012 (roughly £3.0m). That’s more than double the average earned by their peers and nearly triple what HSBC and RBS pay their top staff (about $1.7m each).
Note: the data for those banks marked with an asterisk is their group wide pay disclosure for senior staff and include a lot more staff as a result (Credit Suisse 523 staff, Deutsche 1,215, UBS 501). the figures have been included for illustrative purposes and have not been includes in the overall averages.
2) Tinkering at the edges?
Perhaps counterintuitively, at a time when most people might assume bankers’ pay is falling, pay for lots of senior staff is actually rising. This chart shows the change in total pay in 2012 compared with 2011:
At Goldman Sachs, pay for the top staff in the UK leapt by a staggering 77%, and pay also increased for senior staff at Citi, Credit Suisse, HSBC, Nomura and UBS. On average, across more than 2,100 senior staff in the UK, pay increased by 6%. The only big investment banks that paid their senior staff significantly less in 2012 than the year before were JP Morgan, Barclays and Deutsche Bank.
If you convert the numbers at constant exchange rates, the overall average increase in pay was 8%, and all of the US banks except JPMorgan increased pay. Even if you strip out the surge in pay at Goldman Sachs, pay for senior staff at the other banks was flat on 2011.
3) …or a step change in pay?
It looks like there is more of a step-change in pay when you rewind and compare the 2012 numbers with 2010:
Average pay for the most senior staff in the UK fell by an average 26% between 2010 and 2012, and it halved at Credit Suisse. Now, 2010 was hardly a vintage year for the industry, and sadly the disclosure doesn’t go back any further. But it is a reasonable bet that average pay for the most senior staff in the UK is down by between one third and one half since before the crisis.
4) The wrong incentives
Of course, it’s not just the amount of money that gets people so worked up: it’s the ratio of bonuses to salaries as well. This chart show the variable / fixed ratio for senior UK staff at banks in 2012, with the equivalent ratios for 2011 and 2010:
Several points stand out: first, the variable / fixed ratio has come down sharply from an average of more than five to one in 2010 (shown in red) to ‘just’ three to one in 2012 (possibly under the threat of the European Union bonus cap).
Second, there is still huge variation between different banks: the ratio at JP Morgan, Bank of America Merrill Lynch and Goldman Sachs is still above five times, while senior staff at Morgan Stanley and Citi have to get by on a bonus that is little more than twice their salaries (talking of salaries, fixed pay fell in 2012 compared to 2011, but has increased for senior staff by about one sixth since 2010 to an average $506,000).
And third, if you look closely, you can see that the ratio of variable to fixed pay increased slightly from 2011 (shown in blue). With the bonus cap looming, this could be storing up trouble…
5) Unintended consequences
In order to meet the bonus cap of two times salary (with shareholder approval), most banks are going to have to conduct radical surgery on their pay for senior staff. This chart shows by how much banks would have to increase fixed pay for senior staff to bring their pay into line with the EU cap, or by how much they would have to cut their bonuses to achieve the same ratio (I suspect that won’t happen):
The figures speak for themselves: banks on the left hand side of the chart will either increase salaries significantly or make up the difference with ‘allowances’.
But the right hand side of the chart is more interesting. Citi, RBS and Lloyds already comply with the EU cap (at least for their senior staff), and could afford to cut salaries or raise bonuses and still comply. Who says bankers are paid too much…?