Financial Services Compensation Analysis 2013 March 2013
Contents Executive Summary 3 Paradigm Shift: Compensation & Pay Choices 5 Total Compensation 8 Bonuses 9 Hiring, Headcount and Promotions 10 Regional Hiring Trends 12 Sales & Trading 13 Fixed Income 14 Equities 15 Infrastructure 16 Private Wealth & Asset Management 18 Institutions 20 Fiscal Year Ends 21 Compensation Timeline 21 Bank of America 22 Barclays Capital 23 Credit Suisse 24 Citi 25 Deutsche Bank 26 Goldman Sachs 27 JP Morgan 28 Morgan Stanley 29 Nomura 30 UBS 31
Executive Summary 3
As we proceed into 2013, challenges will be presented throughout the year. In particular, institutions who are based in Europe are under increased pressure to take a more tempered approach to awarding bonuses, even where performance has been favourable. 4 A major challenge will be how firms balance the responsibility of rewarding their employees, and that of their shareholders; whilst also remaining competitive to attract and retain high calibre personnel. With a front-row view of the measures taken by leading financial institutions, Barrington Hibbert Associates has conducted a comprehensive analysis of the compensation and recruitment trends over the recent months. This report summarises the views expressed by senior management around the world, and provides a breakdown of information across departments and geographies. Michael Barrington-Hibbert Managing Partner, Barrington Hibbert Associates
Paradigm Shift: Compensation and Pay Choices 5
As 18th century Congressman Artemas Ward observed, when a fellow says it ain t the money...it s about the money. Compensation practices within financial institutions remained a topical subject during 2012. As we move into 2013, organisations face a more stringent regulatory landscape as well as increased pressure for shareholder returns. The structure of financial rewards given to employees remains under scrutiny. Several reform agendas 1 have issued guidelines on compensation practices. The focus centres on the need to align incentives with longer-term goals, and to reduce the level of risk taking. Key points of the reforms are summarised below. 6 1. Financial Stability Forum, Institution of International Finance, G20 working paper, Turner Review and Walker Review. Variable Compensation For senior executives, 40 60% of variable compensation should be deferred over a period of three years or more. More than 50% of variable compensation should be vested in shares or similar instruments. Guaranteed bonuses after the first year of employment should not be provided. Poor performance should result in lower variable compensation, including the claw-back of amounts previously awarded. Long-Term Compensation Plans Firms should concentrate on the long-term health and security of their businesses by ensuring that deferred and phased payouts are aligned with risk horizons. Risk Alignment Compensation outcomes must be symmetric with cost of capital and liquidity. Unlike previous years, firms should link compensation to long-term results.
The focus centres on the need to align incentives with longer-term goals, and to reduce the level of risk taking
Total Compensation 8 The prevailing theme among financial institutions for 2013 is the realignment of bonuses to overall firm revenues. Aside from reductions in headcount in order to reduce overheads, firms are progressively making more global decisions. Profit-making franchises are increasingly relied upon to subsidise loss-making businesses. This is recognised across geographical regions and across asset classes. Barrington Hibbert Associates has observed that the compensation paid to flow-driven businesses within investment banks, have undergone the greatest degree of restructuring. The 2013 industry average for total compensation is 2% to 3% of business revenue for flow-driven departments, and 7% to 8% for structured products. Average total compensation for 2013 is between 8% to 11 % lower year-on-year (YoY), driven predominantly by reductions in bonus pools. The aggregate figure masks the extent of the overall reduction in bonuses, which were dampened by the upward calibration of base salaries over the past 18 months. Early indicators show there is an emphasis on only rewarding the top 10% of performers. Those who exceeded targets received total compensation that were either flat in comparison to 2012 levels, with the fortunate receiving up to a 10% rise 2 YOY. 2. Rise attributed to an increase in base salaries with the bonus composition remaining flat. Average Compensation by Corporate Grade in 2013 600 ( 000s) 500 400 300 200 100 0 Analyst Associate Vice President Director Managing Director Base (Infrastructure) Bonus (Infrastructure) Base (Sales & Trading) Bonus (Sales & Trading)
Bonuses 9 Front-office bonus pools for some institutions have declined as much as 40% compared to 2012. The industry average is flat to down by 6% YoY. The proportion of junior to mid-level staff 3 within investment banking receiving zero bonuses has increased dramatically. For senior professionals, deferral eligibility is reviewed on a caseby-case basis. Few organisations have opted to implement firmwide remuneration policies. 3. Typically staff with the following corporate grades: Analyst, Associate or AVP. Increased emphasis is being place to only reward strong performance; a gradual shift away from old perceptions, where bonuses were seen as a defined right. With corporate remuneration under the spotlight, the ability to reward top performers has been made possible through reducing the compensation to all others. The need to honour the guaranteed bonuses of new joiners is a contributing factor to the increased variance in the size of individual bonuses. The net cost of support per front office employee has increased by 13% over the past 5 years. There is a renewed focus on reducing fixed costs through increased redundancies and offshoring functions. At the Director and Managing Director level, differences of up to 30% in base salary have been observed between individuals at the same corporate grade, and performing similar functions. Discrepancies in compensation across businesses have led to a degree of internal conflict. Underperforming divisions argue that payment to staff is necessary to remain competitive going forward.
Hiring, Headcount and Promotions 10
Promotions in 2013 are moderately lower in comparison to 2012, as firms recalibrate their respective MD to Director ratios. 11 Headcount across support groups are down 10% across EMEA, predominantly due to increased emphasis on location strategy. Cuts to front office headcount between 4% 12% across all divisions have occurred. This has allowed a more favourable remuneration budget per capita partially offsetting the impact of reduced bonus pools. Several firms have indicated that revenue-generating businesses in Equities and Fixed Income will no longer be paid on par. Business leaders agree that FICC departments will contribute a greater amount to the bottom line as compared to Equities over the next few years. Consequently, total compensation paid to staff within FICC is projected to outperform those in Equities. Director and Managing Director departures are not being replaced like for like. Staffing overheads have been reduced through promoting internal staff into more senior roles, without receiving significant improvement on their respective compensation packages. In Asset Management, the focus on capital preservation and lower fees has led to an overall shift towards passive investment mandates. Without significant changes to AUM, the greater allocation of assets to index-tracking strategies has caused a negative impact on fund revenues. Consequently, compensation levels have been lower. Within Infrastructure, legislation changes (particularly Dodd Frank and EMIR) are driving demand for clearing specialists.
Regional Hiring Trends On the whole, hiring in Asia has remained buoyant. Several new trading units have been set up in Hong Kong and Singapore. Headcount continues to flow out of Japan as several organisations have moved desks out of the region. Headcount reductions have been focused on Europe and North America. 12 The pace of recruitment in EMEA will remain stagnant with institutions only making opportunistic hires. Emerging Market divisions are an exception within the region. Within North America and LATAM, revenues have been driven by businesses geared towards Brazil and Argentina. High performing individuals moving to LATAM are receiving competitive guaranteed bonuses. Headcount: Percentage Change Year-on-Year 15% 10% 5% 0% -5% -10% -15% Fixed Income Equities Infrastructure Asset Management Private Wealth Asia Pacific North America Europe Redundancies due to Division Closures not accounted
Sales and Trading 13
Fixed Income 14 On average, there has been a 3% negative change to total compensation across all businesses in 2013. Total compensation paid to staff within Interest Rates products has received an average of 6% rise YoY. For a number of institutions, bonuses paid to professionals within Credit and Securitised products have outperformed all other areas, reaching double digit growth. Business revenues across Emerging Markets and FX businesses have underperformed. Trading volumes across structured products were lower, in part due to rising costs for clients. Overall, remuneration has followed these revenue trends. Increases in bonus pools have predominantly been restricted to only top performing businesses. Several Fixed Income business leaders have attributed the cause of moderate bonuses to the challenge of higher borrowing costs (wider spreads) faced by financial institutions. Early movers have scaled down capital-intensive fixed income divisions, allocating resources to areas where they are better able to compete. Many firms have reduced staff levels within Fixed Income by 10%, predominantly to reduce risk-weighted assets. Promoted employees within Fixed Income are receiving market aligned pay increases.
Equities 15 Several institutions have made cutbacks to scale-intensive Cash Equities businesses. Barrington Hibbert Associates expects to see more of such moves over the next 12 months. On average, headcount across flow driven desks are down by 9% as trading volumes plummeted during 2012. Headcount in Prime Brokerage is also lower for 2013, while derivatives franchises have fared noticeably better. Profits derived from strong performing franchises have been reallocated to subsidise loss-making areas at a global scale. Performance in APAC and EMEA were particularly weak. Equities: Remuneration Expense Vs. Departmental Revenue Indexed at 2009 January 2009 = 100 130 120 Remuneration Expense 110 100 90 80 70 60 50 Revenue 2009 2010 2011 2012 2013 Projected
Infrastructure 16
The decline in firm wide revenue across the industry has severely impaired bonus pools across Operations, Technology and Finance groups by 8% to 13%. 17 Compensation for top performers within control and regulatory functions, such as Compliance and Operational Risk, has increased by up to 20%. Banks have focused on staff retention in these functions through increasing remuneration. The delivery of phase 1 of Dodd-Frank will take place during Q1 2013 across Europe and North America. This has triggered a demand for specialists in Asia. A number of firms continue relocate business divisions offshore. Headcount across Technology have been reduced significantly. Junior level staff has been the hardest hit, with a large percentage of the population getting zero bonuses. On aggregate, the bonus pools across Infrastructure are down 3% 8% YoY. Geographically, US institutions were in a better position to reward staff. In North America, the top rated performers have been rewarded an uplift on total compensation of 3% to 10%. Regulators have encouraged firms to move Infrastructure staff to salary-only models. However, adoption of this model is unlikely predominantly due to flight risk.
Private Wealth & Asset Management 18
Financial reward in Private Wealth & Asset Management remains highly dependent on investment performance and the product / asset mix. 19 2012 proved to be a rather fragmented year for recruitment, which saw only the best performing firms reinforce their teams across core disciplines. On the contrary, underperforming firms continued with cost cutting programmes and froze hiring. As we enter 2013, improving business revenue has enabled the best performing institutions to restart large- scale recruitment initiatives. Barrington Hibbert Associates has observed a maximum increase in hiring budgets of 8%. With improving returns across core markets (Fixed income, Equities), many firms have indicated plans to strengthen teams across these areas. There has been significant growth across Sales & Distribution in both the institutional and retail markets throughout 2012. This is a clear indication that the ability to raise assets remains a key focus for Asset Management firms. The pace of hiring within Investments (portfolio management, analysts) has reduced. Mid-level and senior placements have been strongest in Emerging Markets and Fixed Income. Barrington Hibbert Associates expects a boost in hiring within Equities in 2013, following subdued activity over the past year. Asset Management: Bonus Deferral Arrangement by Volume 5 50 9 52 36 26 13 9 Fixed cash amount Deferred into funds Deferred into shares Profit-linked 2011 2012
Institutions 20
Barrington Hibbert Associates conducted interviews with senior managers from nine leading institutions: Bank of America Merrill Lynch; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; JP Morgan; Morgan Stanley; Nomura and UBS. 21 Fiscal Year Ends Institution Bank of America Merrill Lynch Barclays Capital* Citigroup Credit Suisse Deutsche Bank Goldman Sachs HSBC* JP Morgan Morgan Stanley RBS* Nomura UBS fiscal Year End December December December December December December December December December December March December Compensation Timeline Institution Bonuses Announced Bonuses Paid Bank of America Merrill Lynch 24th January 2013 February 2013 Barclays Capital* 8th February 2013 February 2013 Citigroup 17th January 2013 January 2013 Credit Suisse 25th January 2013 February 2013 Deutsche Bank 5th February 2013 February 2013 Goldman Sachs 18th January 2013 February 2013 HSBC* 28th February 2013 March 2013 JP Morgan 16th January 2013 February 2013 Morgan Stanley 17th January 2013 February 2013 RBS* 28th February 2013 June 2013 Nomura TBC anticipated March 2013 April 2013 UBS TBC anticipated March 2013 March 2 * Reflects updated intelligence.
22 Fiscal Year End: December 2012 Bonuses Announced: 24th January 2013. Bonuses Paid: February 2013. Basic Salary SMD: 350k MD: 300k D: 175k VP: 120K Bonuses MD Compensation MD Level: 50% cash and 50% stock (stock vested over three years 1/3 paid each year). 25% of cash component is paid immediately; the remaining 75% paid on February 15th in vested stock. $500,000 to $999,999 - will get 15% cash, 40% restricted stock and the rest in unrestricted stock. Director Compensation Director Level: 60 70% cash and 40 30% stock. Within the cash component, 20 30% is paid immediately, the rest is issued in stock options. Vice President Compensation Vice President: 100% cash. Anecdotal Fixed Income Bonus pool down 10%. Equities Bonus pool down 20% on 2011.
23 Fiscal Year End: December 2012 Bonuses Announced: 8th Febuary 2013. Bonuses Paid: Febuary 2013. Bonuses MD Compensation MD s to receive 100% deferred bonus awards. Awards also subject to additional claw-back. Below MD, 65K GBP 100% Cash, 65 250k GBP 35% deferred, > 250k GBP 100% deferred. Anecdotal Europe s bonus pool believed to be significantly lower compared to North America and Asia in relative terms. Bonus pool down by 15 20% down across all FO businesses.
24 Fiscal Year End: December 2012 Bonuses Announced: 17th January 2013. Bonuses Paid: January 2013. Basic Salary MD: 300k D: 160k SVP: 140k VP: 120k Bonuses MD Compensation 40/60 split between cash and deferred stock. New joiners on guaranteed bonuses will receive 75% cash, 25% stock. Director Compensation First USD 100k paid in cash. From USD 100k USD 1m 60% / 75% cash 40% / 25% shares. Vice President Compensation Vice President: 100% cash. Anecdotal Fixed Income bonus pool up 10% YoY. Rates up 10 15%, top performers TC up by 25%, Flat production down 10 15% Equities Sales and Trading pool down 20%, cash equities impacted the most. Introduced performance based vesting for part of the deferred cash plan. Claw back of up to 15% based on future bank performance. Bonuses paid all in cash up to 150k USD.
25 Fiscal Year End: December 2012 Bonuses Announced: 25th January 2013. Bonuses Paid: February 2013. Compensation Structure: 10% cash, 30% CS stock, 30% toxic assets, 30% fixed rate bond. Basic Salary MD: 300K 400k D: 160k 175k VP: 95k 130k Bonuses MD Compensation MD Level: 50% cash and 50% stock (stock vested over three years - 1/3 paid each year). Director Compensation Director Level: 60-70% cash, remainder in stock. Vice President Compensation Vice President: 100% cash. Anecdotal Total bonus pool down by 20%. Introduction OF paf3, deferral is paid as a bond with downside counterparty risk.
26 Fiscal Year End: December 2012 Bonuses Announced: 5th February 2012. Bonuses Paid: February 2013. Basic Salary MD: 300k 350k D: 175k VP: 110k Bonuses MD Compensation Bonuses are 30% cash v 70% stock (stock cliff vested over 3 years). Director Compensation Beyond USD 100,00, 40% paid in stock. Vice President Compensation 100% cash paid out. Total compensation for the Vice President population have been impacted hardest, average total compensation down by 40%. Anecdotal Top 150 will receive part of their deferred award is 5 year vesting. Fixed Income bonus pool down 10 15%. Equities bonus pool down 20 30%.
27 Fiscal Year End: December 2012 Bonuses Announced: 18th January 2012. Bonuses Paid: February 2013. Bonus pool down 10-15%. Basic Salary MD: 320k ED: 175k VP: 110k Bonuses MD Compensation Bonuses are 50% cash v 50% stock equity. Bonuses up between 5 8%. Director Compensation From USD 100k USD 1m 60% cash; 40% shares. Vice President Compensation VPs: receive 70% cash and 30% equity, total compensation down by 30 40%. 100% cash paid out. Total compensation for Vice President population has been impacted hardest, average total compensation down. Anecdotal Fixed income bonus pool up 10 20%, strong performance in Rates and Credit down by 10%. Equities bonus pool down 5 10%, strong differentiation applied, ensuring top performers were paid well.
28 Fiscal Year End: December 2012 Bonuses Announced: 16th January 2013. Bonuses Paid: February 2013. Basic Salary MD: 300k ED: 175k VP: 110k Bonuses MD Compensation Managing Directors: 50% cash and 50% deferred stock over 3 years. Director Compensation Executive Directors: 60% cash, 40% stock deferred. Vice President Compensation VPs: receive 100% cash. Anecdotal Fixed Income Bonus pool down by 5% to flat globally. Equities bonus pool down by 20%, on average TC down by 20%.
29 Fiscal Year End: December 2012 Bonuses Announced: 17th January 2013. Bonuses Paid: February 2013. Basic Salary MD: ED: VP: 300k 350k 130k 180k 95k 110k Bonuses MD Compensation Managing Directors: 50% cash and 50% deferred stock over 3 years. Director Compensation Executive Directors: 70% cash, 30% deferred stock. Vice President Compensation VPs: receive 100% cash. Anecdotal EMEA Rates bonus pool down flat to down 5%, EMEA Credit down 15 20%, EMEA FX down by 20%. 50% of Non MD level receiving zero bonuses.
30 Fiscal Year End: March 2013 Bonuses Announced: TBC anticipated March 2013. Bonuses Paid: April 2013. Basic Salary SMD: 400k MD: 300k VP: 120k Anecdotal The firm is continuing to expand its Fixed Income Division under the leadership of Steve Ashley. Investment Banking and Equities have been scaled back exponentially, as Nomura focused on core Japanese clients.
31 Fiscal Year End: December 2012 Bonuses Announced: TBC anticipated March 2013. Bonuses Paid: March 2013. Basic Salary MD: 225k 300k ED: 180k D: 120k Anecdotal Cash bonuses are capped at 1 million USD for all employees.
For further information, please contact: Michael Barrington-Hibbert Managing Partner T +44 (0)20 7712 1567 michael@barringtonhibbert.com 32 Ben Rowley Business Partner T +44 (0)20 7712 1542 M +44 (0)7891 660 298 ben@barringtonhibbert.com Gareth Mann Business Partner T +44 (0)20 7956 8396 M +44 (0)7877 1 15 859 gareth@barringtonhibbert.com Ania Lichota Partner T +44 (0)20 7956 8394 M +44 (0) 7920 870 694 ania@barringtonhibbert.com
29th Floor, 1 Canada Square Canary Wharf London E14 5YD T +44 (0) 207 129 8018