Investment banks set to cut pay again despite rise in profits

Daniel Schäfer and Camilla Hall
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Global investment banks are set to cut pay for the third year in a row despite a rise in profits, highlighting efforts to put shareholder returns ahead of employee remuneration.

Nine of the largest investment banks in the US and Europe are on track to shrink their overall pay, including salaries, bonuses and other benefits, by a median of 5 per cent this year, according to an FT analysis of their quarterly reports.

These banks set aside a combined $51.4bn in overall pay in the first nine months, 5 per cent less than in the same period the year before. Profits increased by a 10th over the same period.

"Banks are continuing the trend of the last couple of years of realigning returns from employees to shareholders," said Tom Gosling, head of PwC's reward practice.

(Read more: UK banking bonuses up as cap row looms)

"They need to do this, as most banks are still delivering single-digit return on equity . . . and the industry continues to face significant regulatory challenges."

Much stricter capital rules, moves towards electronic and exchange-based trading, and a sluggish global economy have dented investment banking returns in the past few years.

Following dramatic cuts to pay in 2011 and 2012, pay experts expect this year's bonuses – which will be paid out in early 2014 – to be reduced less drastically, with the typical bank shrinking its overall bonus pool by 10 per cent or less.

The data also suggest a growing gap between European banks and their US rivals, which are set to reduce pay by a more moderate amount. In Europe, Royal Bank of Scotland set aside 27 per cent less for investment bank pay in the first three quarters of the year, while Credit Suisse, Deutsche Bank, UBS, HSBC and Barclays set aside between 5 and 17 per cent less.

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In the US, however, Goldman Sachs set aside 5 per cent less, while JPMorgan and Morgan Stanley set aside 4 per cent and 3 per cent less respectively.

"It's fair to say that we used to look at banking globally, now it's more regional," said Alan Johnson, managing director of Johnson Associates, the consultancy firm.

"Clearly the dynamics are different in Europe to those in the US. This is a relatively new phenomenon. Before the crisis it was a global market," he added.

Bankers say that a controversial EU bonus cap, which will limit variable pay to two times salary from next year, will exacerbate the divide.

(Read More: EU bank bonus cap to put pressure on US: Schulz)

EU-based banks will have to apply the cap, which will be limited to the highest earners, while US rivals will only have to comply in Europe.

Most banks are thinking about introducing cash or share-based allowances that would be paid monthly and reviewed annually as a way to deal with the bonus cap.

But investors have been pushing for these allowances to be lower than bonuses were, adding extra pressure on pay.

"It is moving in the right direction but whether it is moving far enough I don't know yet," a manager of a large UK investment firm said.