It seems the UK squeezed out small concessions at the last moment from the European Parliament’s preliminary agreement last night to cap banker bonuses. From 2014, bonuses will be automatically capped at 100% of salary, unless two -thirds of shareholders vote otherwise – in which case they must be capped at a maximum of 250% of salary. Initially the cap was to be set at 200% of salary.
A spokesperson for the European Parliament told us it’s not entirely clear how the new upper limit will work. However, it seems that if sufficient shareholders vote to increase bonuses beyond 100% of salaries, banks will have the option of introducing long term incentive pay instruments (shares or bonds) which vest over more than five years. When these special bonds and shares are added to the mix, the 200% cap can be raised a little.
“When shareholders vote to increase bonuses to 200% of salaries, 25% of bonuses can be paid in long term instruments which can be clawed back,” said the EU spokesperson. “These instruments can discounted when considered as part of total compensation. However, they will be calibrated in such a way that bonuses can never exceed 250% of salary.”
While the City of London has moaned about how the caps will kill business and earlier this week former UK Chancellor Norman Lamont said a bonus cap would precipitate the UK’s withdrawal from the European Union, in reality these caps could have little impact, particularly at today’s higher level.
Our own bonus survey data suggests that salaries in the City typically range from £50k to £400k, based upon seniority. However, most people in the City of London don’t receive bonuses in excess of £100k. In M&A, the average bonus from our sample was only £42k. In equities sales, trading and research it was £72k. For operations professionals it was a mere £13k. Pay figures for junior M&A bankers from Dartmouth Partners, a recruitment firm, confirm the reality: even after five years working in M&A, bonuses are typically still less than salaries.
The word ‘banker’ conjures visions of Ferrari-driving traders. And yet two-thirds or more of the people working in banks aren’t big bonus recipients at all: 68% of Deutsche Bank’s corporate and investment bankers now work in support roles. And the number of support staff is rising.
This is not to say that the EU’s regulations will have no impact. At some banks, notably Credit Suisse, Deutsche Bank and Barclays, bonuses have historically been as high as 400% of salaries for regulated employees. Alex Beidas, an associate at law firm Linklaters pointed out that the EU was moved to introduce the new rules after an investigation by the European Banking Authority found that banks were regularly paying bonuses equivalent to eight or nine times salaries.
This may be the case, but our own bonus data indicates that very generous pay for performance is skewed to a few areas of banks – notably sales and trading and some areas of primary markets. In M&A, mean bonuses and median bonuses were almost identical in 2012, implying very little variation across the range and that pay was pretty much fixed. In sales and trading and (obscurely) ECM, mean bonuses were far higher than the median. This is where the EU’s pay-for-performance cap will really bite.
Mean vs. median bonuses in the City in 2012
Commodities sales, trading and research: Mean: £153k Median: £56k. Ratio of mean to median: 2.7: 1
Credit sales, trading and research: Mean: £118k Median £50k. Ratio of mean to median: 2.4:1
Equity sales, trading and research: Mean: £45k Median: £16k Ratio of mean to median: 2.8: 1
FX sales, trading and research: Mean: £102k Median: £50k Ratio of mean to median: 2.0:1
M&A: Mean: £63k Median: £58k Ratio of mean to median: 1.1:1
Risk: Mean: £22k Median: £10k Ratio of mean to median: 2.2:1
Debt capital markets: Mean: £122k Median: £48k Ratio of mean to median: 2.5:1
Equity capital markets: Mean: £41k Median: £12k Ratio of mean to median: 3.4:1
Source: eFinancialCareers data