By now, it is no secret that banks are having to offer higher salaries to persuade bankers to join or even stay. This is fine as long as revenues hold up, but some people are already wondering what happens when the music stops.
The US investment banks that have so far reported results for the third quarter of 2021 have all revealed that they paid staff more than in the same period last year.
Morgan Stanley spent $5.9bn on compensation in the third quarter of 2021, versus $5.1bn in the same quarter of 2020. BofA’s pay and benefits bill reached $8.7bn, up from $8.2bn a year ago, and the picture was similar at Citi, with group spend on comp and benefits creeping up from $5.6bn in the third quarter of 2020 to $6.1bn over the past three months.
Morgan Stanley linked the rising cost to “higher revenues”. In fact, compensation at MS as a proportion of revenues has actually gone down from 43% to 40% between last October and now.
But while the banks prefer to cast the increased cost of employing bankers as a natural response to the strong business environment, it is also due in part to pressures in the labour market and the struggle to retain employees.
“The market is just crazy at the moment and they’re significantly short on resource because we’re seeing huge amount of movement at analyst and associate level, a huge amount of movement out of banking into buy-side and so forth,” a headhunter told GlobalCapital in September. “We’re also continuing to see some interesting senior people moving out into corporate development roles and this sort of thing.”
“Labour inflation is a question,” conceded JP Morgan’s Barnum in response to an analyst’s question on expenses on Wednesday. “You saw us raise wages in parts of the US at the entry level. That just came into effect this September. And as we look out, we see a lot of churn.”
And if raises only came into effect in September, that means that much of the impact of the salary increases is still to be seen in earnings reports. If revenues fail to keep pace, there could be difficult decisions ahead, in part because banks do not have the same ability to lure talent with enormous bonuses that they used to.
“You don’t have the same ability to manage your cost base because a significantly greater proportion of it is fixed,” noted the recruiter. “So the only way to manage it is to cut, as opposed to managing it through reducing the bonus pool, because the bonus pool makes up a significantly smaller portion of total people cost than it used to.”
Push-back
Analysts are already asking pointed questions about ballooning compensation, although it should be pointed out that they are not fuming about junior bankers’ pay.
In August, Citi revealed new $5m bonuses for CFO Mark Mason, institutional clients group CEO Paco Ybarra and head of enterprise operations and technology Michael Whitaker, linked to the bank’s effort to comply with regulatory demands to improve its risk management processes.
In their first opportunity to comment publicly on the plan since it was announced, analysts did not take it lying down.
“As shareholders and those who represent shareholders, we see this bonus scheme before we see the targets,” said Wells Fargo’s Mike Mayo when the Q&A for Citi’s results opened on Thursday. “So I guess my question is do you have the targets? And if so, can you reveal those? Although I suspect that won't be until March 2. Or do you not have targets yet? Or what's happening? Because either way, it doesn't feel good for us investors.”
CEO Jane Fraser attempted to defuse the situation by stressing that she and the board would hold management accountable, but also said she needed “to retain key talent, because it's a pretty tight talent market right now, as we all know.”
“To hold people accountable and drive the outcomes, we need both carrots and we need sticks,” she said.
It is fair to say that this did not satisfy everyone.
“You’ve had a long-term incentive comp that you’ve always paid your executives, similar to everybody else. So the transformation project seems to be over and above that,” said Vivek Juneja, an analyst at JP Morgan, later in the call. “Shouldn’t that be part of what long term compensation and incentive awards are meant for? I’m trying to understand what the logic behind adding an additional payment here is, because that’s what management is already being partly compensated for.”
What else could Fraser say?
“We need to retain key talent, and it is a very tight talent market, as you know,” she reiterated, while adding that the extra bonus scheme was “fully aligned with shareholders’ interest.”
Moves
So who has been moving amid this battle for talent?
Marc Chowrimootoo is one of those that has recently decided to switch to the buy-side, having previously been a managing director in Goldman Sachs’ leveraged finance team in London.
GlobalCapital reported on Wednesday that he is joining alternative debt specialist Hayfin, which was founded in 2009 by former Goldman partner Tim Flynn and Mark Tognolini, another Goldman alumnus. Birds of a feather, as they say.
Staying with leveraged finance, Mark Richmond is heading to Barclays after a second stint at BNP Paribas in London.
In Nordic equity capital markets, Jens Plenov has left his berth as global head of ECM at Danske Bank for Carnegie Investment Bank. Following his departure, Dankse has opted to put a co-head structure in place, with Christian Hansen and Niels Erik Nielsen taking over.
Amid the labour market upheaval, even long serving stalwarts are being dislodged, such as Rutger van Nouhuijs, who is leaving ABN Amro after 32 years with the Dutch bank.
He has been picked by Citi to oversee banking, capital markets and advisory in the Benelux region, which the US bank sees as a “significant wallet opportunity”.
But he will stick around at ABN long enough to give a proper handover to the man chosen to replace him, Dan Dorner. It is not exactly a like-for-like replacement, as ABN is in the middle of rearranging its divisional structure into three sections. Dorner, who came up through the ranks as a loans, debt capital markets and restructuring banker, will sit at the top of the corporate banking unit.
