Just after Easter two years ago, a delivery truck lowered a silver Aston Martin V8 Vantage roadster onto a shaded street beneath the skyscrapers of London’s Canary Wharf. Hardly anyone stopped to take note. Three years after the collapse of Lehman Brothers and the anti-banker clamour that followed, deliveries of £90,000 ($140,000) sports cars to Canary Wharf during the spring bonus season were still common.
Today, however, the climate seems to be changing in London’s steel, glass and concrete financial centre. “I see fewer of these trucks these days. … In fact, I haven’t seen one in ages,” says a banker at “the Wharf.”
It may take a while before those Aston Martin deliveries pick up. Last year, investment banks in Europe – and to a lesser extent the U.S. – imposed pay cuts that appear to be far more structural than cyclical. “Bank pay has fallen further and faster than many people think, and 2012 has seen a material reallocation of returns from employees to shareholders,” says Tom Gosling, a rewards practice partner at PricewaterhouseCoopers, the professional services firm.
Although it went largely unnoticed by the public, banks cut pay last year even as profits rose markedly. Median profits before tax at nine of the world’s largest investment banks are up 28 per cent in 2012 when the quirky effect of the valuation of their own debt is stripped from the equation. At the same time, overall pay has fallen by 6 per cent.
Experts say this could mark the start of the biggest change in European banker pay in a generation, closing the wide gap between investment banks and other professionals such as lawyers, doctors and engineers. Research compiled by PwC exclusively for the Financial Times shows that this shift is already under way. In 2006, the average pay per head at a sample of nine global investment banks was 9.5 times higher than a cross-sector average taken from the FTSE 100. Since then, it has fallen to a multiple of 5.8 times last year.
European politicians are hoping that this trend will be accelerated by pending European Union legislation for a strict bonus cap for top-flight financiers and star traders. But bankers and pay experts say the cap will merely shift the emphasis toward higher base salaries in Europe. London-based headhunters say bankers are already beginning to lose their obsession with large bonuses because it is no longer assumed that new employers will pay them. “I have never had so many candidates ask me about the prospective base salary. Even a few years ago, most wouldn’t even have known what their base salary is – the bulk of their pay was in bonuses,” says one headhunter.
The divide between pay in the financial services sector and almost everyone else began in the late 1980s. A research report four years ago by Thomas Philippon, an economist at New York Stern School of Business, and Ariell Reshef of the University of Virginia, charted the rise of the U.S. finance sector in the past few decades. In that time, bankers’ pay relative to non-banking professional salaries swelled from almost parity to 1.7 times by 2007. This happened through higher starting wages but, more importantly, bankers enjoyed bigger average pay rises plus hefty bonuses during their careers.
This wage premium was made possible by a wave of deregulation and a credit boom. It prompted investment banks such as Goldman Sachs Group Inc. to ditch partnership models and become publicly listed entities. This kept generous pay structures for employees but relieved them of the burden of shouldering the risks.
Clifford De Souza, a former Citigroup Inc. banker who now heads the international securities business of Mitsubishi UFG, says bankers had forgotten what decades ago used to be their prime purpose. “You wanted to get paid well but with a strong view that your job is protecting the bank. Over the 1990s, somehow that got lost. And certainly in the early 2000s, that got lost completely when people just said if it boosts revenues then we are expected to get paid,” he says.