It's payback time

"An anomaly," says a financial recruitment consultant looking back on the past 15 months. "So many are being made redundant and there are so few job offers out there that it is very difficult to get a clear understanding of what the salaries are like." From bankruptcy to nationalisation, job losses to pay cuts, criticism over ethics and integrity, accusations of hubris and irresponsibility, even denigration of their intellect - bankers have suffered it all in the last year or so. And the credit markets have been at the very centre of this storm. With people finally accepting that things will never be the same again the question arises does it still pay to be in the credit business?

The answer, unfortunately, is less clear-cut than it has ever been. Compiling a salary survey of the credit business is tough at the best of times - the market has never displayed a uniform pay structure and individuals tend to be rewarded on performance - but this year has been an altogether unique task. The dispersion between salaries at banks has widened to levels where individuals can be paid wildly different rates depending on where they work.

The rich get richer ...

The banks that have survived the worst of the carnage, specifically JPMorgan, Barclays Capital, Goldman Sachs and Deutsche Bank and, depending on your point of view, one of Credit Suisse or Morgan Stanley, are obviously in the strongest position and have looked to keep their existing salary structures in place, and in some instances boosted their credit divisions by poaching senior staff from their worse-off competitors. The rest have either been constrained by regulatory pressures, or have simply seen their reputations whittled down to the extent that they have found it increasingly tough to compete for top talent. Names like RBS, Bank of America/Merrill Lynch, Dresdner Bank and UBS have all seen a rapid drain of top personnel.

Current salaries and job opportunities are reflected in this dichotomy. Base salary ranges for directors at the old top tier banks can vary between £100,000 ($145,000) and £200,000, depending on where you work, according to one recruitment consultant, and bonuses are hugely divergent. Some areas, like structured credit, have proven virtually impossible to get a consensus on. "There are too many differences in structured credit right now to be able to get meaningful figures for a survey," says Shaun Springer, chief executive of recruitment firm Napier Scott. "You are seeing great differences in what people are being paid and a polarisation between the top 5% and the other 95% in terms of earning power."

Because of the wide dispersion of salaries, recruitment consultancies have been unwilling or unable to put forward their estimates on pay this year. The numbers that are out there should only be taken as ballpark figures at best. Napier Scott is one consultant which ventured to release a salary survey this year - though with the wide disparity in survey results and the virtual disappearance of certain lines of work, it acknowledged the huge difficulty of conducting its poll. The survey, published in April, proved, aptly enough, that credit salaries have suffered the most of all major asset classes during the credit crisis. According to Napier Scott, structured credit salespeople have seen the biggest pay drop of all front office personnel with an 86% average decrease from the previous survey.

There were similarly steep salary declines in other credit roles. A managing director working in vanilla credit sales at a UK-based tier 1 bank who received a salary of £120,000 plus a bonus of £400,000 will have seen the bonus nearly halved to £250,000 in 2008. For someone working at a tier 2 bank the drop has been even more severe. In 2007 a managing director working in sales was paid an average of £520,000. In 2008 this was reduced to £210,000. In general credit sales functions seem to have been hit worse than credit trading.

Death of a salesman

"The salespeople are currently the poor cousins of trader," says Richard Fisher, senior client partner at recruitment agency Korn Ferry in London. "If you aren't allocated the risk capital to do your job you're going to struggle. I think it will be a lean couple of years on the distribution side." While Napier Scott's survey does not mention credit trading, according to one recruitment consultant, who asked to remain anonymous, traders at state-funded banks are seeing much depressed salaries. Most mid-level performing credit traders received a 60% reduction in bonuses as the bonus pool in most banks declined between 50% and 70% from 2007. And the reward for individually generated profits has also declined significantly. For example a flow corporate bond trader at RBS who made the bank £10 million last year only got paid £200,000 this year, claims the consultant. Similarly at UBS someone on the flow desk making the bank $23 million only got paid £100,000 plus a £100,000 bonus deferred over three years.

But while banks that have suffered most may be finding it hard to pay up, the situation for traders is very different at successful organisations. "In general a flow trader at a nationalised bank will get around £125,000 plus a £200,000 bonus right now," says the consultant. "Someone working in a similar role at JPMorgan will get between £600,000 and £725,000."

Debt capital markets origination salaries have also dropped steeply from the previous year. In 2007/2008 a managing director working at a UK-based tier 1 bank could expect to receive a salary of around £130,000 plus a bonus of £555,000. This year someone working in the same role will receive £150,000 plus a £150,000 bonus, according to Napier Scott.

On the analyst front things are looking much worse than before. The disparity in pay for senior and well-regarded analysts compared with those who are perceived to bring less to the table is wider than ever right now. At RBS, for example, the overall bonus pool for analysts is said to have been down by around 50% for 2008. This, however, was not spread out evenly, with the best seeing only a 20% drop in bonuses and the not-so-well regarded getting paid no bonus at all. Moreover the differences in pay between different analyst sectors is huge right now.

Particularly hard hit have been the high grade analysts, darlings of the market in better days, but shunned in these hard times when all the focus is on vanilla assets and sectors. Those high grade analysts who have not lost their jobs have seen their bonuses decline by 50% to 100%, according to one recruitment consultant. Bank analysts and general credit strategists may still be in demand, however, with bonuses either flat or down by 30% to 40% on last year.

Quantitative analysts are also suffering. A credit derivatives quant in a managing director position at a tier 1 UK-based bank could expect to receive £140,000 plus a £160,000 bonus in 2008/2009, compared with the £140,000 plus £555,000 bonus they were getting the year before, according to Napier Scott.

While analysis is in demand, a pick-up in hiring looks unlikely in the near future, says Eric Felder, head of credit trading at Barclays Capital in New York. "The changing landscape of the underlying credit markets creates much need for research and we have benefited from staying the course in this area through different cycles. Most of the competition, however, has significantly downsized research in the last few years, and many client analysts have become desk analysts. While the interest in doing bottom-up credit analysis is the highest since 2002, few are hiring because they aren't in client-focused expansionary mode."

As suggested above the erosion of bonuses has been the most telling feature of the current year's salary estimates. Banks have been cutting bonuses across the board and many have also become more stringent about paying out unvested stock options from previous bonuses if someone leaves a bank. "It used to be that if you left a bank as a 'good leaver' i.e. not to a competitor, that you could retain your stock options," says Robin Keck, managing director of Robin Keck Associates. "These days if you have stock options and you leave the industry they can't be exercised."

Some have been more innovative: Credit Suisse's manoeuvre to link its bonus payouts to its pools of toxic assets may have given additional motivation to structurers and workout specialists working to revive these damaged assets. Certainly if the bank's first-quarter results are anything to go by - a 70% year-on-year increase in investment banking compensation levels - its plan looks to have been a good one.

Base jump

In order to compensate for the bonus cull, a number of the most vulnerable banks have been raising their base salaries in recent times. According to consultants, both Bank of America/Merrill Lynch and Citi have been working towards implementing a new pay structure which could see salaries hiked from previous levels. UBS already announced a pay hike in February which has seen basic salary levels for directors and above increasing by 20%. While this trend may not be too gratifying for those seeking to curb banker pay, it seems a necessary measure for those firms looking to retain their most valuable employees.

"In the past you never heard of a base salary much above £150,000, but it will probably be commonplace for the senior level guys to get £250,000 going forwards," says a consultant who asked not to be identified. "Even with a modest bonus multiple this is a pretty healthy overall package. If you are a nationalised bank and need to hire someone, the only thing you can do is inflate the base salary."

Yet, according to some, whether a nationalised bank like RBS will be able to retain its staff even if it raises the base salaries remains moot. "RBS did hire some of the best in the market, but I would be surprised if they are able to retain them," says one consultant who asked not to be identified. "They are having to increase their pay from somewhere around £100,000 to £200,000 overnight, as traders at RBS are getting around 10% of the bonus of traders at JPMorgan."

Despite the regulatory pressures on them, state-funded banks have been less than willing to admit to salary curbs. A spokesperson for RBS, for example, agrees that the bank is under pressure to retain its top staff, but denies that there have been any bonus caps introduced. "We haven't had any bonus caps. We need to pay the market rate and we need to make money to pay the government back. To get people you have to pay them the going rate. At the same time we don't have to pay more than the market rate. In some ways it's less, because we are state owned so we are a safer bet."

Hey, big spender

So what hope for the future? If you are at one of the top banks, you can still expect to do very well. In its April first-quarter earnings announcement JPMorgan said that its non-interest expenses - chiefly the higher levels of performance-based compensation expenditure - doubled to $4.8 billion from $2.6 billion a year ago.

Similarly, Goldman Sachs announced that its compensation and benefits expenses for the first quarter of 2009 were $4.71 billion, 18% higher than the first quarter of 2008, despite a 7% decrease in overall employment levels. And the bank also announced that it wants to pay back the US government the funds it borrowed through the TARP scheme as soon as possible in a move that will remove any state impediment it faces in paying even higher levels of bonuses in the future, say analysts.

However these bright spots remain limited to those lucky or clever enough to be at the top banks. For the majority working outside a JPMorgan or a Goldman Sachs the lower pay levels are likely to continue for some time. Napier Scott's Springer says: "The long-term trend we are seeing is that an individual who in 2007 had a package of £1million split between a £100,000 basic with a £900,000 bonus will by 2011/12 probably have a package of £300,000 basic and a £300,000 bonus."

On top of this the likelihood of continuing regulatory pressure as well as the emergence of a host of new boutique organisations, means that the drain of talent out of banks which started in 2008 is likely to persist for some time.

"The environment for people working at investment banks is very different these days," says Paddy Turner, head of European sales for MarketAxess. "The pressures remain as great, the hours continue to be long but the long-term career opportunities are not as clear as they once were. This has made it more difficult for the banks to retain or attract new talent."

With all the doom and gloom it is not surprising that many credit bankers are choosing alternative careers. For those left in the business, the halcyon days of the bull market look to be over. "There is a huge amount of dissatisfaction out there as people gradually understand that the music has stopped," says Fisher.

Credit Structuring: Tough Times

One big difference in the current Napier Scott survey from previous years' is that there is no mention of exotic credit trading or credit structuring. It seems that structurers, once in high demand, have now become the City's pariahs.

Banks started laying off structured credit professionals as early as November 2007, and this has continued throughout last year with concurrent cuts in pay. "There is little hiring going on in structured credit right now and people are still worried about losing their jobs," says Ikenna Iroche, consultant at recruitment firm Correlate Search. "Those that are around are mainly doing restructuring of existing portfolios."

Iroche estimates a 20% to 40% drop in salary for those still in a structured credit job, but adds that desks have already shrunk by between 50% and 80% across the industry in the last 12 months.

Going for Broker: The New Breed

Other than the top five banks, the other major beneficiaries of the drain away from banks are newly established agency brokers who have been looking to beef up their fixed income desks. Names like Evolution Securities, Dinosaur Securities, BTIG and Aladdin Capital have been scooping up ex-fixed income bankers aplenty. And, with decent opportunities for brokers to capitalise on the wider bid/offer spreads in the market, many feel that the performance-linked compensation at brokerage firms is more attractive than at some banks right now.

"Wider bid/offer spreads in the credit markets mean that there is more on the table at an agency broker," comments a source at an interdealer broker. "People at these organisations generally get paid an annual salary plus a defined hard commission payout based on a percentage of the revenue they generate. So the compensation can be the same if not higher than at an investment bank. It gives extra motivation for people to go to these places and create their own floors."

Some smaller regional banks and boutiques which have struggled to break into the top tier of the credit markets in the past have also been able to pick up high profile personnel without paying high rates. Japanese banks, like Tokyo Mitsubishi, Mizuho and Nomura are said to have benefited, as well as boutiques like Oppenheimer. "Mid to senior level people are taking on roles or joining institutions they may not have considered a few years ago," says Richard Fisher at Korn Ferry. "The thinking is that maybe it's time to move to a platform that is establishing itself. If you are at a Citi, for example, you are probably asking yourself what impact can I make on the business and the share price."