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America’s three key investment banks have now reported their third-quarter results. Beyond the revenues, earnings, provisions and the like, analysts are combing financial statements for details on bankers’ compensation; lower pay is seen as an important sign of cost control and, equally important, contrition in the face of public scorn.

As a percentage of net revenues, compensation ranged from 39% at JPMorgan to 43% at Goldman Sachs in the first nine months of the year. The year-on-year decline at Morgan Stanley was especially large, dropping from 60% last year to 42% so far this year. Absolute pay has fallen at all three banks, with a particularly steep 21% drop at Goldman Sachs. In terms of the average pay per employee at Goldman, the decline is an even more severe 30%. Still, few would consider an average wage of more than US$370,000 for nine months’ work a sign of major sacrifice.

Storied investment bank Lazard posted an unexpected loss in its fourth-quarter results yesterday. Employees may not mind, however, as the main explanation for the shortfall was a surge in compensation costs.

Even after excluding one-off charges, pay as a percentage of operating revenue at Lazard jumped from 56% in 2008 to 72% in 2009. A revamp of the firm’s pay policy has made rewards that were once deferred over several years vest more quickly, the bank explained. Chief executive Kenneth Jacobs described the new approach as “playing offense, not defence.” As larger rivals introduce more restrictions—if not outright cuts—to compensation, this strategy is likely to attract a wider pool of players for Lazard to pick for its team.

On Friday, much was made of the fall in compensation as a share of revenue in JPMorgan’s latest quarterly results. With other large American banks reporting results this week, might we see a similar pattern? Are bankers so chastened that they are accepting lower pay?

Yes and no. Michael Mayo, a financial services analyst who testified at the Financial Crisis Inquiry Commission last week, explained how a lower share of pay in relation to revenues may not tell the whole story. Compensation at banks has risen moderately as a share of revenue in recent decades. But when loan-loss provisions are taken into account, recent pay packages appear a lot more generous. According to FDIC data, compensation as a share of revenue at commercial banks is the highest it’s been in nearly 60 years, after accounting for provisions.

Having set aside nearly US$17bn to pay employees in the first nine months of this year, executives from Goldman Sachs are taking to the road to meet with shareholders to “discuss our earnings as well as our compensation principles,” the bank said today. Goldman also released the presentation it gives to investors about its pay practices.

Sure, 20-odd billion dollars for salaries and benefits this year—around US$700,000 per employee, on average—may sound like a lot. But the bank argues that in the context of a “human capital driven industry” this is in line with operating expenses or overheads at widget makers of similar size. What’s more, after detailing the many ways that Goldman Sachs outperforms its peers in terms of profitability and shareholder returns, the bank notes that its correlation between revenue growth and compensation growth is essentially one-to-one. The point this makes is that employees are rewarded in line with the growth of the business. But since the credit bubble burst, hasn’t the idea of linking pay to revenues—and not profits, costs, risks or a host of other metrics—gone the way of the subprime-backed CDO-squared?

By most accounts, hedge funds are attracting asset inflows after a long stretch of net redemptions. But investors aren’t willing to fork over funds on the same terms as before. As a result, hedge fund managers are preparing for a “less lucrative, more transparent future”.

Two recent surveys—one of investors, the other of fund managers—paint a picture of widespread haggling over fees, redemption terms and the like. Around 30% of both investors and fund managers say that they have already negotiated lower fees. More notably, 22% of investors who have not yet pushed for lower fees expect to soon, twice the share of fund managers who expect to implement changes to fees.

Given the ill will stoked by Madoff, Rajaratnam et al, as well as the old adage that beggars can’t be choosers—despite recent inflows, assets under management remain well below the pre-crisis peak—investors are more likely to have the upper hand.

HF surveys 11-11-09

Traders at investment banks are not only generating returns that are the envy of hedge fund managers, but their personal pay packages are getting a bigger bump as well.

Johnson Assoc

According to Johnson Associates, a New York-based compensation consultancy, year-end bonuses for employees in a variety of investment banking roles on Wall Street will see double-digit percentage hikes this year. This excludes, of course, the former high flyers at bailed-out Citigroup and Bank of America, who now operate under the reign of “pay czar” Kenneth Feinberg.

At hedge funds and private equity firms, workers will see bonus cuts of between 15% and 25%, according to Johnson’s report. As unemployment in the US breaches 10% for the first time in decades, before they get too disgruntled these workers should be thankful that at least they have a bonus to cut.

Deutsche Bank reported third-quarter results today, filling in details from a preliminary announcement last week. Its unexpected pre-announcement of headline earnings figures was overshadowed by blow-out results from the investment banking divisions of American rivals.

Deutsche Bank 10-29-09

Although all of the German group’s divisions were profitable in the third quarter, the investment bank’s €988m pre-tax profit accounted for three-quarters of Deutsche Bank’s overall earnings. As is becoming customary, another way of gauging the health of the investment bank is to look at how much it pays its employees. (Amidst widespread anger and resentment over bankers’ pay, this could be called a bank’s “gumption gauge” or “swagger scale”.)

In the first nine months of this year, the average worker at Deutsche’s investment bank earned around €280,000, already more than the €259,000 earned in 2008 as a whole.

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