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Investment bankers have long dismissed any criticism of their pay structures as driven by envy. Now, some acknowledge that pay structures have spiralled out of control. (TOBY MELVILLE/REUTERS)
Investment bankers have long dismissed any criticism of their pay structures as driven by envy. Now, some acknowledge that pay structures have spiralled out of control. (TOBY MELVILLE/REUTERS)

Compensation

Aston Martin, Gucci? Not for European bankers any more Add to ...

In 2009, Prof. Philippon predicted that banker pay would start moving back toward parity with other white-collar professions that require similar skills – just as it did after the Great Depression in the 1930s. The academic, who works as an adviser to the French economics and finance minister, says this is now starting to take shape. “Bankers’ pay in the U.S. will go down by 30 per cent relative to the private sector. But this process takes many years.”

In the first years of the financial crisis, banks slashed bonuses but it looked like another cyclical blip. Business bounced back in 2009 and 2010, and bonuses went up again.

When it became clear after 2010 that new capital rules and other regulations would dent returns, banks cut tens of thousands of jobs. While this adjustment is continuing, it has its limits. “You can reduce staff to a certain level but ultimately the level of money available to staff will go down,” says Mark Quinn, a partner at Mercer’s rewards practice.

With investors last year raising the pressure on banks’ top managers to redistribute more of the spoils, banks moved from cyclical to structural adjustments on pay. “It is coming down simply because banks still aren’t making enough money,” says Tom Gosling, a partner at PwC.

In Europe, multiple scandals and the resultant political heat have added pressure on pay. After large fines paid by Barclays PLC, UBS AG and Royal Bank of Scotland Group PLC for manipulation of the Libor interest rate, each bank cut back investment banking bonus pools by about 20 per cent and clawed back previously promised awards. Governments have been exerting pressure on all banks where directors fear a public backlash. “Everyone who thinks that politicians are not the most powerful force lives in dreamworld,” says the U.K. head of an international bank.

There is also a more subtle, cultural change at play. Investment bankers have long dismissed any criticism of their pay structures as driven by envy. Now, some acknowledge that pay structures have spiralled out of control. “In Barclays and in financial services generally there was a phase of what I think is now seen to have been excess,” said Barclays’ new chairman Sir David Walker.

The head of a European-headquartered investment bank says: “The problem is that bankers control their means of production. A farmer can also keep the grain he produces but there is a limit to how much grain this guy can eat. With money, there is no such limit.”

Bankers on Wall Street, where pay has fallen much less, view pay differently. “Businesses should be able to pay people what businesses choose to pay,” an executive at an investment bank says. “This isn’t a manufacturing business. We don’t have goods to be sold. We just have people.”

In Europe, there is a sense of resignation after years in which bankers have drawn public ire, seen bonuses slashed, and received less up-front cash, while at the same time still being forced to work crazy hours. One investment banker at a U.S. bank in London says he wants to shout “Don’t do it, go elsewhere!” when he sees droves of trainees excitedly starting their banking careers.

Where bankers used to splash out on Gucci handbags and Bollinger champagne in the weeks after bonus day, the number of people receiving a “doughnut” – slang for zero bonuses – has exploded. At Barclays, for example, 45 per cent of investment bankers received no bonus at all for last year.

“When you work in an area where the bank is cutting back, they will tell you that your job is your bonus.” says Stephane Rambosson of Veni Partners, the executive advisory search firm. Headhunters say guaranteed bo­nuses have mostly vanished. The days are also numbered for hedge-fund-style contracts that give traders a certain percentage of revenue.

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