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Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks |
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The process will be unusually fraught with anxiety this year, as bankers are aware that the early rush of post-crisis rehiring is now over. The job cuts at some firms can still be viewed as trimming at the edges but they underscore the end to the build-out by most dealers.
That signals a strengthening of the hands of senior managers, who remain under pressure from politicians and shareholders to demonstrate progress in reducing industry-wide compensation levels and ratios.
Unfortunately for managers, compensation ratios are difficult to cut when revenues are disappointing. After hitting a new earnings record in 2009, with an all-in bet on the fixed-income markets while competitors were weak, Goldman was able to cut its compensation accrual entirely towards the end of the year.
Popular outrage over bonus levels was intense and a fall in the compensation-to-net-revenue ratio could be cushioned by pointing to absolute payment levels that felt respectable to most employees, with the possible exception of some senior London-based staff.
The firm’s top managers can expect more aggressive pushback this year. Goldman noted in its third-quarter earnings announcement that its accrual for compensation and benefits for the first nine months of the year at $13.12 billion marked a fall of 21% on the same period in 2009 and that its compensation ratio had fallen from 47% in the same period in 2009 to 43%. The decision to stop accruing compensation in the fourth quarter of 2009 took the full-year ratio down to about 36% and squawking from Goldman employees can be expected this year if a move is made to cut the 2010 ratio to a comparable level of a smaller pool.
Back-of-the-envelope guesses on compensation at rival firms might help Goldman employees to make a case that enough is enough in terms of compensation ratio pressure.
It was widely noted that Deutsche Bank’s compensation accrual per corporate and investment banking employee was higher than Goldman’s in the first nine months of this year, at around $390,000, compared with roughly $370,000. Gross compensation per employee numbers form a highly unreliable metric, given the varying mixes of staff types. But this figure might still encourage Goldman employees to argue that the rot has gone too far in eroding their traditional advantage over other bankers in terms of compensation.
Morgan Stanley and UBS face equally difficult bonus decisions. Morgan Stanley chief executive James Gorman painted himself into a corner with a statement earlier this year that the firm’s compensation-to-revenue ratio had reached a high point and would only fall on his watch.
This led to some contortions in the bank’s third-quarter earnings announcement, as the bank said that the compensation ratio for its institutional securities group at 52% was “consistent” with the same period in 2009 and blamed the enduringly high level on the effect of technical debt valuation adjustments. The wealth management ratio at Morgan Stanley edged down from 64% to 62%, while the asset management ratio fell from 83% to 36%, as staff numbers were reduced.
UBS noted that it had reduced variable compensation accruals for its investment bank in the third quarter, as might be expected given the sharp downturn in most of its business lines. Residual guarantees at UBS and other firms that were active hirers in 2009 might ensure that some guarantee-free employees feel the effect of the downturn disproportionately in their bonuses at the end of this year.
This will add to the feelings of discontent at many banks.
Depressed stock prices might be a silver lining in the cloud for bankers with bonus grievances. As was the case for the 2008 bonuses made in early 2009, payments made in bank stocks that have fallen can look much healthier when prices recover.
Bankers have to fund the lifestyles to which they have become accustomed with cash in the meantime though. This can create strains on high-spending households, as a reported request by UBS to an end to a $1 million cap imposed by regulators on the annual individual cash portion of its bonus payments demonstrates.
A request of this sort is unlikely to diminish public anger at banking bonus levels, and an inability to manage personal finances might be viewed as a mark against a banker.
