Federal corporate tax rates have fallen from 28 per cent in 2000 to 18 per cent in 2010.Kevin Van Paassen
There are signs that regulators are getting what they want with pay reforms designed to make banks less risky.
The cultural gulf between Canada's independent securities firms - with their eat-what-you-kill pay structures - and the more staid bank-owned investment dealers is steadily widening. Some of the people who recruit bankers and traders say that the result of a move to more deferred pay and smaller cash bonuses at bank-owned firms means they are attracting a more risk-averse type of person, which is what regulators were seeking.
The pay system at independent firms like GMP Securities remains simple. Bankers and traders get paid for the business they bring in. Base salaries are rare, but bonus payments are regular and in cash. Bonuses are big when business is good, and they can dry up in fallow times.
At many bank-owned firms operating in Canada, both domestic and foreign, things are very different. Bonuses are steadier, varying less with revenue, but senior staff face having increasing amounts of their bonus pay deferred in the form of locked-up stock. The top bonus deferral rate at Credit Suisse AG, for example, now stands at 70 per cent. To offset the lack of cash, base salaries are rising, taking the variability out of compensation.
The result is that many bankers and traders who are comfortable with risk are seeking to work at independent firms because of the cash payouts, recruiters say.
"It's not necessarily that one way is better than the other," said Joe Kan, a veteran headhunter who specializes in institutional equities jobs. "The folks at bank-owned dealers - like their employers - are essentially choosing to smooth out their earnings stream and collect what looks like an annuity whereas the folks at independent firms are trading off earnings visibility for additional upside."
"The top institutional equity salesperson at the bank-owned firm, for example, will make their million a year - give or take - year in, year out," Mr. Kan said. "The top salesperson at the quality boutiques will make double that in a hot market but only a fraction of that in a bad market. It's about risk tolerance."
Regulators aren't likely to shed a tear over the trend.
Most independents and boutiques are small and would not hurt the financial system if they were to fail. The bank-owned dealers, especially the global ones, are very different. They are big enough to damage the fabric of the financial system if they crater. What's more, because they are part of bigger banks, failure can put depositors' money at risk, and potentially that of taxpayers.
The competitive implications are intriguing. Will bank-owned dealers be at a disadvantage as staff are less hungry to get deals done because less of their pay depends on it? Will disgruntled employees remain at banks just because they need to stay to collect deferred pay?
"What kind of motivation is that for someone?" said Jim Beqaj, founder of executive search firm Beqaj International. "You want motivated people who are trying to make money."
Bank-owned firms are trying to fight back by funnelling more bonus money to top performers and hot industries such as energy and mining at the expense of bankers in slow sectors, said James Lorimer, a Toronto-based managing director with Ludwig Financial Recruitment.
Even the once-rare zero bonus is now a more common occurrence for those who aren't performing.
"Banks are responding by varying their compensation so that they don't lose people to the boutiques," Mr. Lorimer said "There's still a flight to boutiques because of the deferral on base salaries and that leads to the upward pressure on base salaries."
The irony is, however, as much as a banker might want to move to a boutique to get away from deferred compensation, it's tough for the boutiques to make it happen - precisely because of deferred compensation. Boutiques rarely have the cash lying around to buy out a person's locked-up stock, which can run well into the millions for big producers.
All of this leads to deferred compensation being the thing bankers grumble about most. But Mr. Beqaj, for one, believes bankers should look at it another way, as the best thing that could happen.
"It's been the biggest boon to people's net worth. It's a tax-deferred, forced saving program."
That may be true, and there are those who believe it may lead to a safer financial system, but it's a rare banker who wants to hear it.