Mario Tama
Annual bonuses at top global banks are causing friction that could drive an outsized round of defections as weaker profits and tougher rules widen the pay discrepancy between star performers and everybody else.
That growing difference between a small number of top-fee earning investment bankers and the bulk of their colleagues may see an exodus from big European and Wall Street banks to smaller upstarts or different industries in the weeks and months ahead.
Executives, analysts and industry professionals say the 2010 payout will be transformative for the industry, as political pressure, coupled with a challenging year dramatically change what bankers earn, and in its wake, spur departures that could have a lingering impact on the sector.
"The differentiation this year will be unlike ever before," said a top Asia executive at a large investment bank. "The tail end will be significantly hurt."
While a wave of bankers left or were let go after the 2008 credit crisis, many returned shortly after, enjoying an industry rebound and a hefty 2009 bonus.
Even eventual winners from regional crackdowns on payouts, such as Asia, are expected to be hit by imbalances in awards for 2010, spelling a larger than normal round of defections and unrest in an industry known less for loyalty and more for long hours and big paychecks.
A common axiom at financial institutions is the 80-20 factor, whereby 20 per cent of the bankers rake in most of the revenues. The other 80 per cent may not be top performers, but the bulk of them carry a heavy importance in terms of support, execution, and revenue generation as well.
It is the middle section of the investment bank that top executives worry will be particularly hard hit this year.
"The ratings of individual bankers is getting tougher, so the tail-end of the bank is getting longer. There are now a lot of strong bankers in that tail-end, who will get zero bonus and decide to leave," said an executive director at a large investment bank, who, like all bankers interviewed for the story, did not want to be identified.
With cash payouts for senior staff already restricted by European new pay regulation and U.S. firms under pressure to follow suit - Morgan Stanley revealed last week it was deferring 60 per cent of employee bonus pay - it's an additional headache for banks fighting to remain competitive in a shifting landscape, even as fixed salaries rise.
"This is the first year in a long structural change ... Last year people got paid, this year we will see a lot more clawbackable cash, more deferred stock," Shawn Matthews, CEO of U.S. securities and investment banking group Cantor Fitzgerald & Co., said in a recent interview.
"This year will be the seminal year as far as the change in compensation culture at financial institutions is concerned."
For those operating in the European Union, compensation rules forcing large chunks of bonuses to be paid in stock or deferred will impact the top 200-400 employees per investment banks, analysts at JPMorgan said in a research note.
At some banks with even harsher restrictions, including Switzerland's Credit Suisse , up to 10,000 front office employees will be hit by four-year bonus deferrals.
British bank Barclays is also expected to announce an overhaul of its operational and pay structures.
Significant discrepancies are shaping up among the major European and U.S. banks that dominate the high-paying investment banking industry. Credit Suisse's Swiss rival UBS is planning to boost its bonus payouts this year by up to 25 per cent, Swiss weekly SonntagsZeitung said on Sunday.
Banker bonuses have come under heavy fire from politicians and the public after trillions of taxpayer dollars were used to rescue banks and prop up the financial system during the global crisis.
Most banks raised salaries this year to prepare staff for more fixed compensation, rather than a discretionary bonus. In some cases, for managing directors globally, that meant a salary cap of around $300,000 (U.S.), excluding bonus, compared to the previous $250,000 cap.
Likely to benefit from this in the long run are regions such as Asia, with one investment banking head at a European house predicting that bankers would be gravitating to "the growing emerging markets divisions at U.S. banks, or others not under the European constraints."
But even a bumper year for Asia's thriving capital markets - Asia-Pacific investment banking fees rose 22.2 per cent over 2009, leading all regions, according to Thomson Reuters - won't translate into an exceptional 2010 bonus round in the region.
Asia is still a small portion of the overall revenue pie, with more than half of the $84-billion worldwide investment banking fee revenue last year coming from the Americas and Europe bringing in almost twice as much as Asia, estimates from Thomson Reuters and Freeman Consulting showed.
The total compensation band for investment bank managing directors in Asia has narrowed to the $1-million to $2.5-million range, down from $1.5-million to $3.5-million previously, according to Christian Brun, a founding partner at executive recruiting firm Wellesley Partners.
For employees not in the upper 20 per cent club, the pay hit this year could be a lot harder.
"Because there's less money around but pressure to ensure you keep good people, there's some evidence I've had from conversations with some of the banks that they are being more selective than they traditionally have between their outstanding performers and their less good performers," said Ron Collard, a partner at PricewaterhouseCoopers in Singapore who advises financial institutions on their human resource policies.