At least one major investment bank is weighing the option of freezing bonuses for their junior investment banking jobs, a move that could catch on if other major banks follow their lead.
Credit Suisse is reportedly considering suspending the automatic bonuses doled out each year to analysts, associates and some vice presidents, according to a story in Businessweek. These staff will still get their regular annual salaries, but bonuses may be lowered to keep total pay flat from the year before.
Industry insiders are watching to see if other big banks such as Goldman Sachs or JPMorgan Chase follow suit. If they do, it could mark a turning point on the Street. But if not, it could open up Credit Suisse to large-scale defections by junior bankers who are able to get higher pay packages elsewhere.
Junior-level bankers typically comprise about three quarters of a firm’s workforce. They often start with base salaries in the $200,000 range, and can expect increases of 15 to 20 percent each year. An investment banker often spends three to four years as an analyst or associate, then three more years as a vice president before being named as a director. Top-producing vice presidents in their third year can earn in the neighborhood of $600,000 to $700,000 in total compensation, according to the article.
A plunge in trading revenue and European debt worries have put a crimp in profits for the big banks, thus leading to more strategies for cutting costs. However, limiting pay among junior bankers could be a risky move since juniors tend to talk more with peers and former classmates and compare notes. The news of lower entry-level pay at one firm can put it at a disadvantage recruiting new employees.
Many of the big U.S. banks will inform their employees about salaries and total compensation by the end of January. New compensation schemes would go into effect at the beginning of February. With earnings estimates slashed by a downturn in trading revenues, the banks are eyeing each other’s compensation plans carefully this month before determining their next step.
What’s your opinion? Do you think the inevitable downward pressure on total compensation, especially for more junior employees, is going to put a damper on young people pursuing investment banking jobs? Add your comments below.
Investment banks would have to change the way that some of their traders are paid, if one of the proposed restrictions in the evolving Volcker rule comes to fruition, reports Businessweek.
The new rule is part of the Dodd-Frank Act, which is being crafted by regulators from five Washington agencies and could be released in October. It proposes that traders who are involved with market-making must meet at least seven criteria or principles. One principle would be that they get paid from fees and the spread on their transactions, rather than appreciation or profit from their positions.
This change in pay structure could drive traders out of the regulated financial industry into unregulated sectors, says one industry expert.
Many major banks such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley have already shut down or spun off their standalone proprietary-trading groups in anticipation of Dodd-Frank regulations.
Market-making traders, however, along with certain forms of hedging and underwriting, will be exempt from the Dodd-Frank rule providing they meet the seven criteria. The reason is that a broad ban on all of these activities could potentially bring a halt to some markets, since large firms like Goldman Sachs and Morgan Stanley serve a purpose as market-makers by accepting risk or holding shares of trades in order to facilitate client orders.
In addition to the restriction on traders’ compensation, other conditions require that trading positions have near-term demands and no large anticipation positions; have a revenue structure based on fees and commissions and not on making money on the positions themselves; and that firms fall under the Securities and Exchange Commission’s guidance of a “bona-fide” market-maker.
Banks would also be required to institute compliance programs to monitor when traders are moving toward banned positions. These internal controls are designed to ensure the firm does not place too much capital at risk.
The draft regulations may still change under intense lobbying pressure from members of the industry.
“The challenge inherent in creating a robust implementation framework is that certain classes of permitted activities — in particular, market making, hedging, underwriting, and other transactions on behalf of customers — often evidence outwardly similar characteristics to proprietary trading, even as they pursue different objectives,” according to a statement by the Financial Stability Oversight Council, a group of regulators established by Dodd-Frank.
Do you think these restrictions on trading activity and compensation are inevitable or necessary? Will they affect your investment banking career plans or your firm? Add your comments below.
It has been two years since the financial crisis put a major crimp in hiring and salaries. But it appears the downward pressure on investment banking job compensation is here to stay, at least for a while, reports the Wall Street Journal.
According to the “Wall Street paymaster” interviewed for the article, an executive inside a major investment bank who oversees salary and bonuses, the real numbers are indeed falling.
In the pre-crisis days, median pay for mid-career bankers was roughly $2.2 million a year, of which $200,000 was in base pay with the remaining $2 million as an annual bonus, including 60 percent in cash. That averaged about $1.4 million before taxes, resulting in an after-tax take-home pay of $700,000 a year.
Today, however, this Wall Street insider claims the median pay is more in the neighborhood of $1.6 million. Base pay has shifted higher due to public pressure against encouraging bankers to take excessive risks, and now sits at around $400,000. But now 60 to 70 percent of the bonus portion comes as deferred compensation, mostly as company stock. And by the way, this deferred stock can disappear if you switch jobs.
Net result? A banker isn’t pulling in nearly as much cash in his or her first year of employment in a mid-level job. Only about $380,000 after tax. Better than a plumber or electrician (most, anyway). But quite a bit less than investment bankers were accustomed to living on before.
What this means is that bankers today may be looking at working later into their careers before even thinking about retiring. Nor can they necessarily look for a big, cash-cow year to bump up their nest egg. According to the Journal article, with tighter rules on using leverage and higher reserve restrictions on banks, the big investment banks just aren’t making as much money as before. And that’s hitting salaries overall.
In fact, according to the source quoted in the article, today, a $5 million compensation package puts you in the top 10 percent of investment banking job earners.
What’s your opinion? Have you seen downward pressure on the compensation packages at your firm? Overall? Add your comments below.
