What’s happening with investment banking compensation? Are lower pay and higher deferrals really inevitable? We asked Jon Terry, remuneration partner at PricewaterhouseCoopers.
Two big factors are likely to influence IB compensation levels: profitability and the share of profits distributed to employees.
If banks continue to de-risk, profits will fall. If shareholders demand a higher share of profits, pay will fall exponentially.
We’ve seen broadly lower levels of compensation as a proportion of profits over the past two years and this is likely to continue. This could result in overall compensation levels falling quite substantially – maybe by as much as 20-50% over the next five years.
Yes. Pay could rise.
If banks ringfence or separate their IB divisions, shareholders may accept higher IB compensation levels as the price to pay for their exposure.
Over 50% will be in deferred stock or instruments linked to the bank’s underlying long term exposure. This will apply at even modest levels of bonus and a higher proportion will be deferred at higher levels.
Financial uncertainties are reducing profits. It’s difficult to identify the small number of truly alpha-generating employees. And there’s pressure from external stakeholders (media, regulator and government) on perceived appropriate levels of pay.