Banks look to retain junior talent by boosting bonuses
Wall St and City take action to retain next generation
Deutsche Bank is taking a new approach in the battle to retain junior talent: some managing directors are planning to make small cuts to their own bonuses so they can pay their subordinates more.
Sharp falls are also expected at Deutsche, where new boss John Cryan has been sceptical about banking’s bonus culture, saying he does not understand why bonuses motivate employees and warning that its third-quarter €6.2bn loss would be “factored in” to payouts.
However, bankers and recruiters have told the Financial Times that juniors — a term that typically covers bankers with less than a decade of experience — would do better than their bosses in this year’s bonus season.
Paul Sorbera, president of the New York financial recruiters Alliance Consulting, says banking’s younger generation can expect bonus increases of up to 10 per cent on a like-for-like basis, a view echoed by senior bankers in the City.
“It’s 100 per cent true [that junior bankers will do better],” one of the London bankers says, adding that the competition for junior talent was “phenomenal” because banks had hired so few people after the financial crisis.
At Deutsche, managers are so concerned with keeping their teams that some are forgoing their own bonuses, two people familiar with the situation said. One of the people said it was happening on a “case by case” basis and was not a formal bank policy. The bank declined to comment.
The large pay gap between managing directors and their underlings, plus the fact that bonuses take up to five years to be fully paid out, and that as little as 30 per cent is paid in cash, makes this a less painful exercise than it might look like for managers.
US banks do not disclose the bonuses they pay, but total pay and benefits figures released by Citi and JPMorgan last week show a fall of 9 per cent and 1 per cent respectively. The other big US banks report results later this week, before the European banks commence on January 28.
Credit Suisse’s CEO Tidjane Thiam laid the ground for big cuts at his bank with a January 13 speech in Paris where he said the pay model for investment bankers “does not work”. Bank insiders say the overall bonus pool will be cut by more than 30 per cent at Credit Suisse’s new Global Markets and Investment Banking & Capital Markets divisions. Cuts will fall heaviest in the areas that Credit Suisse is pulling back from such as leveraged finance, while standout performers will enjoy bonus increases.
Barclays is also cutting back its investment bank, but new CEO Jes Staley is not expected to take the same stance on bonuses as Mr Thiam and Mr Cryan. UBS, which had a big restructuring in 2012 and is now far less exposed to trading, is not expected to make big bonus cuts.
Mr Sorbera of Alliance Consulting estimates that bonus payouts across Wall Street are down 10 per cent. He believes juniors will defy the slump even in the under-pressure fixed income, currencies and commodities businesses which are at least holding their remuneration steady, he said, while their seniors endure sharp cuts.
Mike Karp, New York-based chief executive of the executive search firm Options Group, agrees that banks tend to protect their younger staff. “In situations where bonus pools have decreased — junior people are usually insulated from large compensation declines,” he says, adding that there was a “lack of supply of people with about five to seven years’ experience”.
Lombard: Income generation
Some Deutsche Bank managing directors are bumping up the pay of juniors by reducing their own, writes Jonathan Guthrie.
In an attempt to keep staff, banks have unveiled a host of initiatives to dissuade fed up under-30s from defecting to trendier industries such as technology or more lucrative employers like hedge funds and private equity groups. In November, Goldman Sachs even said it would promote juniors faster.
With relatively inexperienced staff paid a few hundred thousand dollars a year, banks need not pay millions to retain them. Employers are also mindful of the future, Mr Karp adds. “You have to pay your staff generously at that level. They could be the next generation of superstars.”
Bankers on both sides of the Atlantic saw sharp fall offs in their pay in the immediate aftermath of the financial crisis, as losses and bailouts mounted and a public outcry at a system that rewarded bankers with multimillion dollar bonus payments for taking risks.
Things have stabilised over the past few years in the US, where the five big Wall Street banks — JPMorgan, Goldman, Citi, Bank of America and Morgan Stanley — held pay and benefits steady in 2014, despite a 1.36 per cent fall in revenue.
That was in contrast to European peers UBS, Barclays, Credit Suisse and Deutsche where bonuses, already far lower than their pre-crisis level, were slashed by another 12 per cent as revenue fell 1 per cent.
|In fixed income, managing directors command average salaries between £200,000 to more than £400,000 with bonuses of 100-200 per cent, according to data from City recruiter Michael Page. Their analysts, with one-three years’ experience, are paid an average of £45,000-£80,000 with a bonus of 30-100 per cent. The gap is similar in other parts of investment banks.
That means that an MD could increase his juniors’ bonuses by more than 20 per cent by allocating a quarter of his own bonus among 18 of his juniors, assuming the MD and the juniors were both earning salary and bonus at the lower end of the range.