Are you pricing yourself out of the market?
It’s a question that’s worth asking in light of a) banks’ attempts to reduce their compensation ratios, b) banks’ need to hire hundreds of extra compliance staff who detract from rather than add to, the bottom line, c) banks’ clear preference for ditching expensive senior staff in preference for less costly mid-ranking people, d) banks’ need to invest millions in electronic trading systems and e) the ongoing rout in fixed income trading which previously powered banks’ profitability.
In the circumstances, how can you tell if you’re overpaid? Brad Hintz, banking analyst at Bernstein Research, suggests it’s easy(ish): if you’re a managing director (MD) in a markets business and you’re not bringing in multiples of your compensation in revenues, you’re expecting far too much. “The percentage of MDs on the trading floor is dropping from 20% to 10%,” says Hintz. “The really expensive people are dropping off and banks are taking a chunk of the compensation pool out in the process.”
In the distant past, most banks targeted compensation-to-revenue ratios of 50%. On the whole, therefore, it was possible to cover your back if you brought in revenues that were double your compensation. However, that’s changed – Goldman Sachs cut its compensation ratio to 42% in the first six months of the year and the compensation ratio across JPMorgan’s corporate and investment bank is now more like 31%. If you want to earn your keep, you therefore now need bring in revenues that are at least 2.5 to 3.2 times higher than your pay. And that’s before the cost of capital and the increased cost of technology and regulatory and control staff has been factored in.
At banks Barclays, where compensation costs were handily omitted from yesterday’s results, Chris Wheeler, a director at Mediobanca, says front office staff need to work especially hard to justify their compensation. While most banks have two non-revenue earning staff for every back office banker, Wheeler says the ratio at Barclays is more like 4:1.
At JPMorgan, technology staff are reportedly accepting lower pay in an attempt to avoid pricing themselves out of jobs. Hintz suggests that senior and mid-ranking bankers might want to do the same – especially in sales and trading (M&A and ECM are doing fine). However, he admits this is a hard call. “Psychologically, it’s very difficult for someone who’s been making $5m to accept that they’re only worth $2.5m. But there are plenty of people out there who will do your job for $1m,” he cautions.