The pay and bonuses landscape

One lasting effect of the financial crisis has been increased scrutiny of bankers' salaries and bonuses, which has in turn led to a raft of new legislation. Those working in the structured products industry have also been subject to changes in the way they are paid. But banks are struggling to come to terms with these reforms, and opinions are split about how they are affecting the jobs market.

Fundamental reforms that have come into force as economies recovered include a change in the split between basic salaries and bonuses, bonuses paid in stocks, clawbacks in cases where a department performs badly, and the use of vesting schedules to incentivise employees to stay with a company.

In the City of London there were concerns that top bankers would simply up sticks and move to avoid pay caps. But while European regulations have been the toughest, Wall Street and Hong Kong banks have also faced greater scrutiny and there has been legislation across financial centres to limit and expose banker pay.

The Dodd Frank Act, which passed into US law in July 2010, contains several statements on salaries and bonuses. They are outlined in US law firm Morrison and Foerster's The Dodd Frank Act: A cheat sheet. The first of these is that "companies must include a resolution in their proxy statements asking shareholders to approve, in a non-binding vote, the compensation of their named executive officer."

Disclosure is required under the Act to show the relationship between executive pay and company performance. Companies must also "disclose the median annual total compensation of all employees (except the chief executive officer), the annual total compensation of the CEO, and the ratio of the median employee total compensation to the CEO total compensation".

Stock exchanges are also required to adopt standards obliging listed companies to develop means to recoup compensation "in the event of an accounting restatement", according to Morrison and Foerster.

In June 2010, the US Federal Reserve also issued guidance relating to incentive compensation. It advised that compensation should not incentivise employees to "expose their organisations to imprudent risk".

Banks in the US were first to change their pay policies, according to one London-based recruitment consultant. "In the first six months of 2009, there were four banks that decided to raise their salaries. These consisted of three American houses (Citi, Morgan Stanley and Bank of America Merrill Lynch (BAML)) and the Swiss house UBS," he says.

This set a precedent across the banking system, with most other large banks following suit, says the consultant.

Further changes took place last year as banks struggled to come to terms with new rules and regulations. One New York-based structured products banker working for a European bank outlines a few of the adjustments: "Some of the vesting schedules have [been extended] on our non-stock component, while some deferral amounts have gone up and some deferral schedules have lengthened. I have heard that several US banks are still having issues regarding compensation levels and stock proportions."

The banker cites BAML as one institution that is struggling to work out its compensation levels, and says anecdotal evidence suggests that Citi's compensation in 2011 will be down as it rebuilds its teams having lost people during the crisis. One of the biggest changes is that policy is "no longer uniform", he says.

According to figures from one search and consultancy firm with offices in London and New York, basic salaries for managing directors at US banks ranged from $173,571 to $473,308 (£110,000-£300,000) at the end of 2009.

Total compensation for a managing director or president of sales falls anywhere between $750,000 and $3 million, while on the structuring side, a managing director or a president will get paid between $500,000 and $1 million.

Some banks have changed their compensation models to fit the ‘higher base salary, lower bonus' model, says Les Jones, vice-president for financial services at International Market Recruiters in New York.

"On the other hand, Barclays Capital has taken a different approach. Instead of giving a $250,000 base salary, they would offer a $150,000 base with $100,000 fixed pay, with a $50,000 bonus bringing the total compensation to $300,000," says Jones.

"This is done to compete and lock up their talent but avoid paying incentives on the fixed pay... such as 401K [retirement savings plans] contributions and bonus percentages. In short, Wall Street is shying away from the big bonuses it was used to, and coming up with direct and creative ways to subsidise the differences," he adds.

Wall Street is picking up, he says. At the end of 2010, International Market Recruiters was seeing lots of hiring activity, although some firms (Morgan Stanley is one he names) are freezing hiring as they review their headcount and budgeting forecasts for 2011.

Even so, it remains a hirers' market, says Jones. Before the crisis, employers "took chances on candidates that may have one or two attributions needed out of five needed to do the job," he says. In 2008 and most of 2009, this was raised to five out of five. This has eased slightly, he says, and entry-level candidates are being hired again, which can be seen as a positive sign.

Not everyone is seeing a pick-up though. The New York-based structured products banker says that in terms of revenue the market is fairly flat and not much hiring is taking place.

Stricter EU limits on compensation

While the US government passed legislation on pay, there are no detailed limits on cash bonuses. The European Union has gone a step further and has defined limits on what bankers can receive, a step which some say is holding the market back.

In June 2010, rules were agreed under the Capital Requirements Directive (CRD 3), which stipulates that its requirements should be in force by January 2011. Final guidelines were issued by the Committee of European Banking Supervisors in December.

Under the rules, cash bonuses will be capped at 30% of the total bonus (20% for particularly large bonuses). Between 40-60% of any bonus must be deferred and can be recovered and at least 50% of the total bonus will be paid as ‘contingent capital', which can be called upon in case of bank difficulties.

The Directive also includes rules relating to disclosures of remuneration policies and payouts, which will have to be made on a yearly basis.

In the UK, the Financial Services Act 2010, which was passed by the outgoing Labour government, gives the Financial Services Authority (FSA) powers to recover remuneration payments if they do not comply with its remuneration rules. The FSA has also updated its Remuneration Code to take account of the new EU rules. The updated rules now apply to more institutions, and senior managers and risk takers must have at least 50% of their remuneration paid in shares.

However, uncertainty over what the new rules will eventually entail has not stopped some parts of the City flourishing. Job opportunities in London's financial sector are increasing, according to a report by recruitment firm Morgan McKinley in October.

The firm's London employment monitor revealed a 5% month-on-month increase in opportunities and a 13% increase from October 2009. At the same time, salaries took a slight dip, with the average City salary down 4% from September 2010 to October 2009 levels. Salaries have fluctuated throughout 2010, with the average at £51,245 in October. One recruitment site advertises a position for a London-based head of structured products with a base salary of £200,000.

Morgan McKinley predicts that hiring activity will be even busier in the first quarter of this year. In preparation, Renovofinancial, a new low-cost recruitment company, was launched in November.

However, while he expects a general pick-up in the next couple of years, York-based director of Renovofinancial Chris Parker is far from bullish about the state of hiring in the structured products market in the UK.

"What the past two or three years have done is to blow apart a standardised understanding of what a five- or six-year structured products analyst could get in terms of overall compensation," says Parker.

While splits between base salaries and bonuses have changed on the sell side, "on the buy side... base levels haven't moved for the last two or three years and bonus levels are just starting to get closer to where they had been".

He says relatively few opportunities are opening up, and that the buy side still suffers from a lack of investor capital and difficulty in building new funds. Where hiring is taking place, it is mainly on the sell side, especially in the larger houses.

In fact, there are many big names in the City which have had record years on their exotics desks, says a managing director at a London-based structured products boutique.

The UK structured products market was badly hit following the FSA review of structured investment products in 2009 and the closure of several plan managers, but the banker is confident it will catch up with the wider market.

Now the problem for banks is working out how to remunerate their staff. "Some basic salaries are going up between 80% and well over 100%, which is a way for banks to retain staff they value," says the banker. Uncertainty over what they can and cannot do is hitting smaller companies harder, he says, and many are simply sitting and waiting.

He disagrees with the rules that require bonuses to be paid partly in stocks. While he says it is fair at a very senior level, "if you take it onto the trading floor... do you want your wealth tied into one business?" Far from discouraging risk taking, he says that if it drives up the price of the stocks employees own, "they are very happy indeed". Staggering remuneration could drive up the cost of hiring, he says, as bankers demand more to cover the bonus they are losing by leaving another institution.

Asia opts for self-assessment

Banks in Asia have not had to face the same hurdles. "Increased regulation has affected the decisions that some European and US banks are able to make regarding compensation packages. Banks headquartered in Asia have not been affected by these issues," says Richie Holliday, chief operating officer at Morgan McKinley North Asia in Hong Kong.

But they have not completely escaped regulation of their employees' compensation. The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) are moving to make sure that remuneration reflects "sound risk management".

To that end, the HKMA published its Guidelines on a sound remuneration system in March 2010, and together with the SFC asked authorised institutions to complete a self-assessment to show how they are complying with the guidelines.

Law firm Allen & Overy lists some of the points that the institutions are asked to comply with as outlined in the self-assessment. They are: "limiting guaranteed minimum bonuses (or sign-on bonuses) to new hires in the first year of employment and/or retention arrangements on sale/wind-down of a business"; "record-keeping of rationale for exercise of judgement and final outcomes at bonus pool level" and "termination of employment will not trigger payout of deferred remuneration, other than in exceptional cases".

Most Asian banks have made similar changes to the base salary/bonus split as banks in the US and UK. One Hong Kong-based financial services executive search consultant speculates that the rise in base salaries could be a retention ploy, but Morgan McKinley's Holliday attributes this to the long-term perspective that has now been adopted.

"There has been a shift from comparing the size of compensation packages from one year to the next at different institutions, to much more of a focus on long-term revenue creation and value-adds. Additionally, the ‘deferred compensation' package is now becoming the norm," he says.

Closer inspection of the market shows a split by asset class. The equity derivatives business is doing comparably well and banks are still making hires in that area, says Holliday. Anything credit-linked has suffered, he says, adding that "compensation for fixed-income products has dropped overall as the previous challenging year produced a poor bonus pool".

Recruitment consultant Michael Page's salary and employment forecast for 2011 paints an optimistic picture. Over the past six months, employee numbers have increased in 78% of the institutions it surveyed. Barclays Capital and Standard and Chartered Bank were among those bolstering their teams in Hong Kong at the start of 2010, according to the Hong Kong-based financial services executive search consultant.

Nearly half of the companies questioned by Michael Page expect to see increased salaries over the next six months. The forecast reports that the average salary for a director in investment banking/corporate finance is HK$2 million or more. However, it reports that market rates are becoming much less uniform, which is similar to what is happening in the UK, according to Renovofinancial's Parker.

With increases in hiring and salaries, the jobs market in Hong Kong seems well on its way to recovery. While all three major financial centres have adjusted the split between basic salaries and bonuses, and total compensation remains largely unchanged, Hong Kong seems to have escaped the close scrutiny that is to some extent still plaguing the other two markets.