Bad pay check

Banker pay cut deceleration may have wider effects

Investment banks seem to have reached a threshold on allocating more pay to shareholders rather than employees. US and European firms have held steady the percentage of revenue apportioned to employees in recent years, pay consultants McLagan found in a study published on February 2. Given still-tepid returns, banks should be doing more than treading water on pay.

European firms have been more progressive than international peers. Banks in Europe are likely to pay out an average of 25 per cent of capital markets revenue to staff for their 2014 performance, down 16 percentage points from 2007, said the McLagan study, carried out on behalf of the Association for Financial Markets in Europe, a lobby group. That compares to just over half as big a decline to an average 27 per cent compensation-to-revenue ratio for US peers over the same period. The compensation ratios that McLagan calculates are lower than the 30 per cent-plus equivalents typically reported by banks because they exclude bonuses awarded from previous years and include additional revenue.

But an encouraging post-crisis rebalancing to shareholders at the expense of employees has stalled. US and European broker dealers have either raised or held their compensation ratios steady since 2012.

That is remarkable: none of the world's largest investment banks is on course to post a 2014 return on equity above the 11.2 per cent achieved by Goldman Sachs.

True, most banks are in the middle of a multi-year shift into agency-model brokers. But McKinsey estimates that the average cost of capital for a bank is between 11 and 12 per cent.

Banks in Europe, West Asia and Africa are at least still cutting pay per head. Average pay per investment banker is down 20 per cent over the last five years, McLagan's numbers show. Yet with revenue also falling, the consultants' 2 per cent forecast pay per capita reduction for 2014 will fall short of tilting the balance more in the favour of shareholders.

One explanation for the stasis may be that investment banks fear losing staff to buyout and asset management firms, both of which McLagan reckons now offer higher average pay. But investor returns in private equity and hedge funds have also disappointed of late. If investors start to lose patience, investment banks could have company when it comes to cutting pay.