Say the bank had cut its investment bankers’ pay for that period by 25%, that would have saved $1.94 billion and boosted return on equity to 16.4%, closer to the kind of number investors used to take for granted in pre-financial crisis days.
Could investors ever expect JPMorgan and other investment banks to do that? The boost of such a pay cut for those with lower returns and thinner capital would be even more impressive, perhaps taking the laggards above their cost of equity, as long as it did not reduce revenues.
So far, cost cutting has been remorseless but more focused on reducing the numbers of full-time employees and not so much on cutting survivors’ pay levels. European regulators’ efforts to constrain bonus payments has simply led to a near doubling of fixed pay for key staff at large banks. The investment banking industry, one of the few in which labour has beaten capital out of sight, still needs to re-set.
High levels of pay persisted through the crisis, with some large banks continuing to pay hefty bonuses even when they stopped paying dividends; others paid bonuses in aggregate worth 10 times more than total dividend payouts to shareholders, even as their share prices tanked.
Investment banking is hardly as competitive today as it was pre-crisis, with regulators and investors forcing banks to specialize in core areas, to take less risk and so become more utility-like.
Research by Emolument into investment banking pay scales in London last year suggested that JPMorgan is one of the most generous payers for investment bankers with four or five years’ experience at the level of vice-president. JPMorgan pays staff at this level £360,000 ($450,000.) That compares with Morgan Stanley paying £260,000; Deutsche Bank paying £252,000; Bank of America Merrill Lynch £238,000; and Barclays Investment Bank £232,000, according to Emolument.
When it gets to more senior levels such as managing director, other firms catch up. JPMorgan pays £915,000 at this level, less than BAML, which pays £977,000, but still well ahead of the leading Europeans. UBS pays managing directors £767,000; Barclays £756,000; Deutsche Bank £681,000; and BNP Paribas £568,000, according to Emolument. One needs to treat all these numbers with caution. But it is hard to think of any other profession paying staff in their late 20s to mid 30s at these rates.
Barclays’ annual report for 2015 revealed that of Barclays’ 138,000 employees, nearly 13,000 receive between £100,000 and £1 million, with 323 on over £1 million. It is a fair guess where most of the top-paid ones work, and it is not in credit cards. The report shows that the whole group ran a ratio of compensation to revenue of 37.2% for 2015.
For the first nine months of 2016, Barclays reported pre-tax profit of £2.495 billion in the investment bank on revenues of £8 billion and claimed an 8.7% return on average allocated tangible equity for the division. The Barclays group tax rate is 36%. Let us be generous and say the investment bankers are paid at the group ratio of compensation to revenue (they probably take more). That implies they take out £744 million from divisional revenues over the first nine months. Slice 25% off their pay and the division would be producing an 11.3% return on equity. That is at least up close to its cost of equity.
For the first nine months of 2016, Goldman Sachs reported group revenues of $22.438 billion and compensation expenses of $9.2 billion (a 41% ratio), with net after-tax earnings of $5.05 billion for an annualized return on average shareholders’ equity of 7.8%.
For the first nine months of 2016, Deutsche Bank reports a 10% post-tax average return on equity at its corporate and investment banking division, which paid out a miserly €1.352 billion or just 24% of its revenues of €5.676 billion. Still, let us be brutal and apply the 25% pay cut. That boosts return on equity to 12.1%.
Given the volatility they have just suffered, Deutsche shareholders deserve some compensation. For the year-to-end September 2016, UBS reported total operating income for its investment bank of SFr5.67 billion ($5.58 billion), of which personnel costs consumed SFr2.339 billion or 41%. On just SFr698 million of pre-tax profit, UBS manages to calculate a return on “attributed” equity of 12.1%, not attributing, it seems, very much at all to investment banking these days (just SFr7.7 billion on an annualized basis).
Working back through the numbers, Euromoney calculates that by paying its staff 25% less, UBS would boost that return to an industry leading 22%. In these capital constrained times, that is the impact of leverage: operating leverage.