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The real lure at European banks on Wall Street: the massive salaries

Salaries European banks Wall Street

European banks are hiring feverishly on Wall Street. McKinsey & Co is reportedly advising Deutsche Bank CEO John Cryan that the U.S. is the market to conquer. Barclays is busy pursuing its aim of becoming the preeminent transatlantic bank. Credit Suisse just got itself a head of U.S. equities trading from UBS and BNP Paribas has hired a new head of global markets institutional sales for the Americas.  Hiring is on, and the Europeans are not holding back.

Bloomberg reported yesterday that European banks are luring Wall Street talent with hefty pay packages beyond those on offer at rival U.S. firms. “They’re playing catch-up,” said Jason Kennedy, CEO of Kennedy Group in London. Mike Karp CEO of the Options Group, said the Europeans are offering guaranteed bonus packages that make their total compensation 30% higher than U.S. rivals’.

However, other headhunters in NYC say the focus on bonuses and guaranteed compensation misses the point: what differentiates European Union-based banks on Wall Street isn’t the guaranteed bonuses but the salaries. The salaries are huge.

Huge salaries are said by headhunters to be particularly in evidence at Deutsche Bank’s U.S. operation. Deutsche Bank first hiked salaries in its investment bank in 2014.  It hiked them again for juniors in 2015. And it hiked them again under John Cryan in January 2016.  The increases applied to all regulated staff, which at Deutsche Bank now means everyone above vice president (VP) level.

As a result, Wall Street headhunters say Deutsche Bank’s salaries are now considerably out of kilter with the rest.  “If Bank of America Merrill Lynch is hiring a managing director on $2m total comp, they’ll pay a salary of $450k plus a bonus of $1.55m,” says one headhunter with DB as a client. “At Deutsche Bank the salary will be $700k and the maximum bonus will be twice that at $1.4m.”

The cause of the discrepancy is the European Union’s bonus cap, introduced in January 2014. The cap forbids banks from paying bonuses greater than twice salaries for all regulated staff. Despite banks’ efforts to prevent the rules applying outside the EU, they also extend to their operations in the U.S. and on Wall Street.

Deutsche isn’t the only bank afflicted by the cap: Barclays, BNP Paribas and SocGen are under it too. However, headhunters say Barclays’ salaries are less out of line than Deutsche’s, possibly because the bank opted to pay large role-related allowances instead of increasing salaries when the bonus rules were introduced. Meanwhile, the EU has banned its banks from paying ‘hard’ guaranteed bonuses (but permits guarantees which are linked to targets and are a range instead of a hard figure) in all but exceptional circumstances. Deutsche – for example – only paid guarantees to 25 people last year.

Deutsche’s enormous salaries risk causing a headache if its Wall Street revenues don’t increase quickly. While U.S. banks are still operating a variable pay model, Deutsche is ramping up fixed costs every time it recruits. This is an issue given that Deutsche’s investment bank already has one of the highest cost ratios in the sector.  With compensation typically eating up 40% or less of revenues at banks now, the BAML trader in the example above needs to generate $1.2m to cover his or her compensation costs. The trader at Deutsche needs to generate $1.8m.

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Photo credit: IMG_0135 by Ilkka Jukarainen is licensed under CC BY 2.0.

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