Banks have even begun to reduce base salaries, starting at the top. Last year, the average base salary for a managing director in the City of London fell for the first time by 29 per cent to £167,364, according to data by Astbury Marsden, a recruitment firm. Banks achieved that by slashing the number of senior bankers and partly refilling those posts with juniors. Credit Suisse last year chopped more than a quarter of its senior positions in its advisory and underwriting units in London. Vice-presidents who have been promoted to managing directors typically receive less pay than their predecessors. Bankers who are lucky enough to clinch a job at a rival after being fired elsewhere often have to swallow a 10-to-15-per-cent lower base salary, Mr. Rambosson says.
Such pay cuts are far more prevalent in Europe than in the U.S., where most banks, with the exception of Morgan Stanley, continue to pay higher salaries and bonuses with more up-front cash. This was highlighted by recent data showing that average cash bonuses paid to Wall Street employees jumped 9 per cent last year, thanks to rebounding profits and dramatic job cuts. “It is clear that there is a split opening up between New York and London,” Mr. Gosling says.
Bankers and pay experts fear the EU’s plan to limit bonuses to the same size as salaries will widen the rift to the detriment of the City, London’s financial district. They say the reform will push up basic salaries for the highest echelon of bankers, while damaging a process to make bankers more accountable through deferrals and clawbacks of bonuses.
Politicians such as Philippe Lamberts, a Belgian member of the European Parliament who pushed through the EU bonus cap almost single-handedly, have argued that overall staff pay has continued to rise in relation to revenues at many banks. Pay experts claim this remuneration ratio was inflated by payouts for laid-off employees and past-year deferrals, thus obfuscating the trend of falling pay.
With investment banks’ average return on equity at about half of what they pay for their shareholders’ capital, investors and analysts say the structural changes in pay will continue. Despite marked reductions, investment banks globally still paid their staff an average of £212,000 last year – higher then a decade ago and 4.6 times the remuneration in the insurance sector. “To restore the industry as a whole to clear double-digit returns, either pay would have to fall by a quarter or productivity rise by a third,” Mr. Gosling says.
Mr Philippon says the pay gap with sectors that require similar skills will close slowly as it takes time for lower entry salaries and slower relative wage growth to work through the system. “Bankers have in the past not only been hired with a higher starting salary, but they have also enjoyed a faster growth rate. But what you will see in the next decade is slower wage inflation than in other sectors.”
The global head of a medium-sized investment bank says: “Bankers are kidding themselves if they think they are worth what they are making.” Another London-based executive adds: “Banking has to go back to being a normal profession rather than the quasi-entrepreneurial business it has been in the past decades.”