Investment bankers may be feeling hard done by this January. But they’re not doing as badly as their shareholders. Though the industry’s dire performance this year is expected to squeeze the bonus pot, overall compensation may not fall as fast as revenue. Given the industry’s meagre return on equity, investors are bound to demand a bigger share of the smaller pie.
At some firms, the amount awarded in fresh bonuses could be half the 2010 level. However, overall industry pay, which includes salaries as well as deferred payouts from previous years, is likely to fall by just 5.4 per cent, according to JPMorgan analysts. That’s only half the projected drop in revenue. As a result, the share of revenue paid out in compensation – which had fallen since the financial crisis – is set to rise to 46 per cent for 2011, up from 42 per cent a year earlier.
Industry aggregates mask differing performances. Revenue at Morgan Stanley, Deutsche Bank and Barclays Capital is forecast to have held up better than peers, which makes a minor trim to compensation costs easier to justify. JPMorgan itself managed to buck the trend: though revenue in the investment banking division was flat, total compensation fell slightly, even after subtracting the one-off costs of the U.K. bonus tax in 2010.
Banks have also had their hands tied by post-crisis regulatory demands that they defer a big proportion of bonuses until future years. At UBS, for example, deferred bonuses accounted for 60 per cent of the Swiss bank’s variable pay in the third quarter.
Investors may have tolerated big bonuses during the boom, when investment banks were generating returns on equity of 20 per cent or more. But patience is being stretched. Most investment banks now trade at a 30 per cent discount to net asset value – suggesting that investors don’t expect returns to exceed the cost of equity.
Some shareholders are already agitating for change – Britain’s Association of British Insurers has asked five U.K. banks to cut pay to ensure they earn an adequate return on capital. Barring a recovery in the industry’s fortunes, the bonus squeeze has further to go.