Gazdasági Ismeretek | Befektetés, Tőzsde » William Wright - Taking Stock on Pay, 10 Things we Know about Pay at Investment Banks and Asset Managers

Source: http://www.doksinet INVESTOR NEWSLETTER ISSUE N°3 FALL 2005 TAKING STOCK ON PAY 10 THINGS W E K N OW (AN D D ON ’ T K N OW) A B OU T PAY AT INVESTMENT B ANKS AND ASSET MANAG ERS February 2016 by William Wright > This report is an update on the main trends in pay at investment banks and asset managers over the past decade to help inform the debate on this important issue. www.newfinancialeu Source: http://www.doksinet INTRODUCTION INVESTOR NEWSLETTER ISSUE N°3 FALL 2007 Getting pay right More than seven years after the financial crisis, pay and bonuses are still a lightning rod for criticism of banks, investment banks and asset managers. One of the problems is that the debate around pay is based on poor information: public disclosure by the industry is patchy, inconsistent and often confusing. This report is an attempt to put some hard numbers on what has been happening to pay at investment banks and asset management firms over the past decade. It updates our

initial report from last year and shows that while progress has been made, the industry still has further to go in addressing pay. The report provides full information on pay at investment banks and asset managers from 2004 to 2014, but only includes a few estimates for 2015 based on the small number of firms that have reported their results so far. We will update the 2015 numbers once all of the firms in our sample have published their results and additional disclosures in their annual reports later this year. Sample and methodology: Our sample included 18 asset management firms or asset management divisions of larger groups which have comparable disclosure on pay, and 12 investment banks or corporate / investment banking divisions of larger groups. We also analysed ‘material risk takers’ (senior staff) at 18 banks and investment banks. All of the numbers have come from public disclosures, and have been converted into USD at average annual exchange rates.We have used average

headcount to calculate compensation cost per employee and adjusted the numbers to incorporate changes in reporting by different firms. (* denotes that a firm has been included in our initial 2015 estimates). New Financial is a think tank and forum that believes Europe needs bigger and better capital markets to help drive its recovery and growth. We think this presents a huge opportunity for the industry and its customers to embrace change and rethink how capital markets work. We are a social enterprise that launched in September 2014. We are seeking financial support from institutions and individuals this year. For more information on New Financial, contact us on: william.wright@newfinancialeu +44 203 743 8269 Our sample of investment banks included: Barclays (investment bank), Credit Suisse (investment bank)*, Deutsche Bank (corporate banking & securities), Evercore, Goldman Sachs (group)*, Greenhill, Jefferies, JP Morgan (corporate & investment bank)*, Morgan Stanley

(institutional securities), RBS (markets division), Rothschild, UBS (investment bank)*. Our sample of asset managers included: Aberdeen Asset Management,* Affiliated Managers Group, Allianz Asset Management (Pimco + AGI), Ashmore, BlackRock*, Franklin Templeton, GAM, Henderson, Invesco, JP Morgan Chase (AM division)*, Julius Baer, Jupiter, Man Group, Morgan Stanley (AM division), Schroders, T. Rowe Price, UBS (AM division)*, Unicredit (AM division). For the data on senior staff (or Material Risk Takers as defined by the European Banking Authoirty and disclosed in the banks’ Pillar 3 reports), our sample of banks included: Bank of America Merrill Lynch (UK), Barclays, BNP Paribas, Citi (UK), Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs (UK), HSBC, JP Morgan (UK), Lloyds, Morgan Stanley (UK), Nomura (UK), RBS, Santander, Societe Generale, Standard Chartered and UBS. Acknowledgements: I would like to thank Laurence Bax at New Financial for his diligent research and data

mining. Any errors are entirely my own 2 www.newfinancialeu 10 THINGS WE KNOW ABOUT PAY INVESTOR NEWSLETTER ISSUE N°3 FALL 2007 Chart&1:&Coming&down$ Getting pay right. Average$compensa7on$cost$per$ employee$at$investment$banks$$ 2007$to$2015$$000$ Here are 10 things we do and don’t know about pay at investment banks and asset management firms: 400$ 395$ 333$ 330$ 297$ 300$ 292$ 300$ 295$ 278$ 250$ 1. We don’t know a lot about pay Disclosure on pay and bonuses across the industry is patchy, inconsistent, and often confusing. Many big financial groups don’t disclose pay in their investment bank or asset management divisions, and only a handful disclose information on fixed pay, bonus pools or deferrals. 2. Pay is falling at investment banks Average compensation cost per employee (a decent proxy for pay) fell by 25% between 2007 and 2014 to around $295,000 (see chart 1).Based on a small sample, we estimate that it fell by another 6% last year to

$278,000. 200$ 100$ 0$ 2007$ 2009$ 2011$ 2013$ * Note: 2015 figure is an estimate 2015e$ 3. There has been a step change in the structure of pay at investment banks In the six years before the financial crisis, pay represented 49% of revenues (known as the ‘compensation ratio’). In the six years after the crisis this fell to 41% We estimate that the compensation ratio fell from 39% to 38% last year. 4. Average compensation cost per employee at asset management firms has risen since the financial crisis to $263,000 in 2014. However, we should be wary of comparing the pay at asset management firms with a few hundred or few thousand staff, with pay at investment banks which have tens of thousands of staff. Based on a small sample, we estimate compensation cost per employee flatlined last year. 5. At asset management firms, pay as a percentage of revenues has remained broadly flat at about 35% over the past decade, and revenues relative to assets under management have

fallen by 15% over the same period. As a result, pay is increasing in line with the growth in assets under management. 6. The fall in pay at investment banks reflects a decline in output per employee: adjusted for inflation, revenues and pretax profit per employee fell by between10% and 20% from 2004 to 2014, and average pay per employee fell by 27%. At asset management firms, the increase in revenues, profits and assets under management per employee outstrips the increase in average pay per employee. 7. Bonus pools at banks are shrinking in absolute and relative terms. At a sample of six banks with comparable disclosure, bonus pools shrank by 31% between 2010 and 2014, and they have shrunk relative to revenues, and pretax profits. 8. Awarded pay - salaries plus bonuses awarded for performance in any particular year - is a better measure of pay (although only a handful of firms disclose it). This has shrunk by 15% since 2010, which translates into a fall in pay of 7% per

employee. 9. The concept of average pay is misleading at investment banks. Pay is highly concentrated at the top of each firm. The top 1% of staff at banks share about one third of the total bonus pool; senior staff at investment banks earn nearly 10 times as much on average as the rest of the banks’ employees; and front office staff are paid on average more than four times as much as support staff. 10. There has been a big shift towards more fixed pay and more deferred bonuses The proportion of pay for senior staff that is fixed has tripled from 16% in 2010 to 47% in 2014. That means the ratio of bonuses to fixed pay has fallen from 5:1 to roughly 1:1. Two thirds of bonuses for senior staff awarded in 2014 were deferred 3 www.newfinancialeu PAY & BONUSES ARE FALLING AT INVESTMENT BANKS FALL 2007 INVESTOR NEWSLETTER ISSUE N°3 Coming down • Pay at investment banks is falling. Average compensation costs per employee across the industry fell by 25% to about $295,000

between 2007 and 2014. In real terms, that’s a drop of nearly 40% (see chart 2). Chart&2:&Falling&pay&at&investment&banks$ Average$compensa;on$cost$per$employee$at$investment$banks$2004$to$2014$$000$ 500$ Real$terms$ 386$ 400$ 315$ 395$ -25% 337$ 300$ • ‘Average compensation costs per employee’ is not quite the same as ‘pay per employee’ (see the box on definitions, below) but it is the best available proxy and is a useful way to measure changes over time at individual firms. • In absolute terms, if you strip out estimated social security, pensions and other costs of around 15%, that translates into average ‘pay’ per employee of around $250,000 (or €189k or £153k) in 2014. • Pay is continuing to fall: based on the small number of investment banks that have reported their numbers for 2015, we estimate that average compensation cost per employee fell by another 4% last year to $283,000. 333$ 330$ 297$ 2009$ 2010$ 2011$ 292$

300$ 295$ 2012$ 2013$ 2014$ 250$ 200$ 100$ 2004$ 2005$ 2006$ 2007$ 2008$ Chart&3:&A&structural&shi/&in&pay& $Average$compensa9on$ra9o$at$investment$banks$2002$to$2014$%$ 178%$ 60%$ 50%$ 56%$ 51%$ 46%$ 47%$ 47%$ 47%$ 47%$ 37%$ 43%$ 40%$ 39%$ 39%$ 40%$ 30%$ 20%$ A structural change • The fall in pay marks a structural shift in the economics of the industry (see chart 3). In the six years before the financial crisis, pay represented 49% of revenues (known as the ‘compensation ratio’). In the six years after the crisis, this fell to 41% (and is still falling). We estimate that the compensation ratio fell from 38% to 37% last year. • We estimate that pretax profits in the industry were roughly 75% higher in 2014 than they would have been if pay had been as high relative to revenues as it was before the crisis. 4 2002$ 2003$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ 2014$ Average pre-crisis 49% Average

post-crisis 41% Definitions When it comes to pay, definitions are important. This report uses ‘compensation cost per employee’ as an imperfect but constant proxy for ‘pay. per employee’ This number divides ‘compensation and benefits’ or ‘staff costs’ in the accounts by the average number of staff employed by the firm during the year. It is not the same as ‘pay per employee’ because it includes other costs such as social security, pensions and severance costs (actual pay would be about 15% to 20% lower). It also includes some elements of deferred bonuses awarded in previous years, but excludes bonuses awarded in a given year but deferred to future years. www.newfinancialeu PAY HAS BEEN RISING AT ASSET MANAGEMENT FIRMS INVESTOR NEWSLETTER ISSUE N°3 Flattening off • Average compensation cost per employee at asset management firms has increased since before the financial crisis to $263,000 (see chart 4).That’s an increase of around 6% since 2007 but a fall

in real terms over the same period of 11%. The increase in pay reflects the growth in assets under management and increase in asset prices since the crisis. • We should be wary of reading too much into a comparison between average pay at investment banks - most of which have tens of thousands of staff and a long tail of support staff - and asset management firms that employ a few hundred or few thousand staff. • The economics of the asset management industry have not changed as dramatically as for investment banks (see chart 5). Revenues per dollar of assets under management have fallen from an average of 52 basis points before the crisis to 44bps since. Pay as a percentage of revenues has remained relatively flat over the past decade at about 35%. Changes in productivity • In real terms (assuming inflation of 2.5% a year) employees at investment banks have become less productive over the past decade while staff at asset management firms have become more productive (see chart

6). • Pay per employee at investment banks fell by 27% between 2004 and 2014 in real terms, while revenues and pretax profits per employee fell by 10% and 20%. This is mainly because of an increase in the number of non-revenue generating (and lower paid) support staff. At asset managers, the increase in pay per employee of 23% is more than offset by an increase in revenues, AuM and profits per employee. 5 FALL 2007 Chart&4:&Rising&pay&at&asset&management&firms$ Average$compensa;on$cost$per$employee$at$asset$management$firms$$ 2004$to$2014$$000$ 400$ Real$terms$ 300$ 248$ 200$ 188$ 168$ 216$ 214$ 244$ 251$ 2010$ 2011$ 246$ 260$ 263$ 2012$ 2013$ 2014$ 203$ 100$ 0$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ Chart&5:&The&economics&of&asset&management& $Pay$relaAve$to$revenues$$(LHS)$&$revenues$relaAve$to$AuM$(RHS)$at$asset$managers$2004$to$ 2014$%$ 50%$ 60$ 45%$ 40%$ 70$ Pay$/$revs$%$(LHS)$

Revs$/$AUM$bps$(RHS)$ 37%$ 50$ 38%$ 35%$ 35%$ 35%$ 35%$ 36%$ 34%$ 35%$ 35%$ 35%$ 35%$ 40$ 30$ 30%$ 20$ 25%$ 10$ 20%$ 0$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ 2014$ Chart&6:&Changes&in&produc3vity& %The%change%in%producDvity%per%employee%at%asset%management%firms%and% investment%banks,%2004%to%2014%(assume%inflaDon%of%2.5%%pa)%% 84%% 42%% 23%% Pay% Revenues% !11%% Pretax%% !18%% Pay% 29%% Revenues% Pretax% profits% AuM%$m% !27%% Investment banks (per employee) Asset managers (per employee) www.newfinancialeu BONUS POOLS ARE SHRINKING INVESTOR NEWSLETTER ISSUE N°3 Smaller pots • The size of bonus pools at banks has been shrinking steadily since the financial crisis. Between 2010 and 2014 the combined bonus pool at six banks that provide comparable disclosure (Barclays, Credit Suisse, Deutsche Bank, HSBC, RBS and UBS) fell by 31% to $17.6bn (see chart 7). • This may overstate the fall in

bonus pools because the sample only includes European banks, which have been hit harder by the financial crisis than their US counterparts. However, comparable data is not available for US banks. • The decline in bonuses is less pronounced if we include other variable pay, such as commissions and other incentive payments that some banks also disclose. On that basis, total variable pay at banks fell by 26% between 2010 and 2014 to $21.7bn (see chart 7) • However, adjusted for the 10% decline in headcount at the banks in the sample between 2010 and 2014, the size of the bonus pool per employee has fallen by 23%. FALL 2007 Chart&7:&The&decline&in&bonuses&and&variable&pay# Value#of#bonus#pools#and#variable#pay#at#a#selec>on#of#six#banks#2010#to#2014# (2010#=#100)# #######Bonus#pools######## #####################All#variable#pay ## 100# 80# 60# 100# 100# 80# 40# 71# 77# 69# 2012# 2013# 2014# 83# 75# 79# 74# 2012# 2013# 2014# 20# 0#

2010# 2011# 2010# 2011# Chart&8:&The&changing&shape&of&bonus&pools& $The$rela>ve$size$of$bonus$pools$at$a$selec>on$of$six$banks$2010$vs$2014$%$ 2010$ 2014$ 54%$ 47%$ 35%$ 28%$ 26%$ 19%$ 10%$ %$of$pretax$profits$ %$of$total$awarded$pay$ %$of$reported$ compensa>on$ 8%$ %$of$revenues$ • Bonus pools have also shrunk in relative terms. Chart 8 shows that bonuses in 2014 were significantly lower relative to pretax profits, awarded pay, reported compensation and revenues than they were in 2010. • It is dangerous to read too much into the decline in bonuses and variable pay without taking what has happened to fixed pay into consideration (see next page). 6 www.newfinancialeu AWARDED PAY IS FALLING - BUT MORE SLOWLY INVESTOR NEWSLETTER ISSUE N°3 A better measure • The headline decrease in the size of bonus pools overstates the decline in pay in the banking industry. • A better measure is ‘awarded pay’, which includes

salaries paid in a given year, as well as bonuses and other incentives awarded for performance in that year (but, because of deferred bonuses, not necessarily paid out in that year). One challenge with this metric is that only a handful of banks disclose comparable data on awarded bonuses and salaries (and only two investment banks provide this information). • Our analysis of five banks that disclose this information at group level (Barclays, Credit Suisse, Deutsche Bank, RBS and UBS) shows that awarded pay fell by 15% between 2010 and 2014 (see chart 9). Chart&9:&The&fall&in&awarded&pay& %Value%of%awarded%pay%(salaries,%bonuses%+%other%incenGves)%at%a%selecGon%of%five%banks% 2010%to%2014%$bn% -15% 80% $63bn $54bn 60% 25.1% 20.1% 37.8% 40.0% 2010% 2011% • When you adjust the decline in awarded pay for the 10% fall in headcount at banks between 2010 and 2014, fixed pay per employee increased by 3% and total awarded pay fell by 7% per

employee. 7 18.5% 19.5% 18.1% 37.5% 34.1% 35.5% 2012% 2013% 2014% 40% 20% 0% Salaries% Bonuses%&%variable%pay% Chart&10:&The&changes&in&awarded&pay& %The%changing%shape%of%awarded%pay%at%selecIon%of%five%banks%2010%to%2014%%% 10%% 3%% 0%% Bonus%pools% • While bonus pools shrank by 31% and all variable pay dropped by 26%, fixed pay only fell by 6% (see chart 10). FALL 2007 All%variable%pay% Fixed%pay% Awarded%pay% !6%% !10%% !20%% !15%% !18%% !23%% !30%% !31%% !7%% !26%% Headline% Per%employee% !40%% www.newfinancialeu MORE FIXED PAY AND MORE DEFERRED BONUSES INVESTOR NEWSLETTER ISSUE N°3 Raising the bar • Bonuses have come down dramatically as a percentage of total pay. Fixed pay as a percentage of total pay for the most senior staff at banks in Europe tripled from 16% in 2010 to 47% in 2014, according to our analysis of pay data for nearly 15,000 senior staff at 18 different banks and investment banks (see chart

11). • This means the ratio of variable pay to fixed pay for the most senior staff at banks and investment banks in Europe has fallen from 5:1 in 2010 to roughly 1:1 in 2014. This is mainly the result of tougher regulation around bonuses and the imposition of the bonus cap, which limits bonuses to 100% of fixed pay (or 200% with permission from shareholders.) Chart&11:&The&increase&in&fixed&pay&for&senior&staff& $The$balance$between$fixed$and$variable$pay$for$senior$staff$at$banks$in$Europe$ 2010$to$2014$%$ 72%$ 84%$ Fixed$%$ 75%$ 75%$ 47%$ 28%$ 25%$ 2011$ 2012$ 25%$ 16%$ 2010$ 2013$ 2014$ Chart$12:$The$shi6$from$variable$to$fixed$pay$ $The$split$between$fixed$and$variable$pay$$for$all$staff$at$European$banks$2010$to$2014$%$ At$five$banking$groups: 40%$ • Chart 12 also shows that variable pay has fallen as a proportion of total pay since 2012 at the two investment bank divisions that disclose the relevant numbers

(Barclays and Deutsche Bank). 2010$ 8 Variable$%$ 53%$ • The same effect is visible at group level for all staff at big banks. Chart 12 shows that fixed pay as a proportion of total pay increased from 60% to 66% between 2010 and 2014 at a sample of five European banks that disclose comparable data. • There has also been an increase in deferred bonuses since 2010, although not perhaps as big as expected (chart 13). For the most senior staff, 64% of bonuses awarded in 2014 were deferred, up from 61% in 2010. At group level, the percentage of bonuses that are deferred has actually fallen from 44% to 38%, mainly as a result of a larger number of people being paid smaller bonuses. FALL 2007 60%$ $ 33%$ 33%$ 67%$ 67%$ 2011$ 2012$ 36%$ 64%$ 2013$ $$At$two$investment$banks:$ 34%$ 66%$ 2014$ Fixed$%$ 38%$ 42%$ 46%$ 58%$ 54%$ 62%$ 2013$ 2014$ 2012$ Variable$%$ Chart&13:&The&increase&in&deferred&bonuses&

&Propor:on$of$bank$bonuses$for$senior$staff$and$all$staff$that$are$deferred$$ 2010$to$2014$%$$ $ 70%$ 65%$ 61%$ 60%$ 60%$ 64%$ 64%$ 50%$ 40%$ 44%$ 47%$ 44%$ 42%$ 30%$ 38%$ 20%$ 2010$ 2011$ 2012$ Code$staff$ 2013$ 2014*$ All$staff$ www.newfinancialeu PAY AT BANKS IS HIGHLY CONCENTRATED INVESTOR NEWSLETTER ISSUE N°3 The tyranny of averages • Pay is highly concentrated in the top few hundred or few thousand staff at banks and investment banks. Chart 14 shows the percentage of the total bonus pool at banks and investment banks that was paid to the most senior staff in 2014. FALL 2007 Chart&14:&&The&concentra/on&of&pay&at&banks&& &Propor;on$of$total$bonus$pool$paid$to$senior$staff$at$European$banks$2014$ $ 64%$ 56%$ 35%$ 35%$ 35%$ 34%$ 27%$ 17%$ • On average at group level the most senior staff represent roughly 1% of all staff and share a third of the total bonus pool between them. • These numbers

make a mockery of ‘average’ pay. Using data from one European bank, the average compensation cost per employee in 2014 in its investment bank division was $283,000 (see chart 16). Awarded pay per employee was $233,000. The most senior staff earned an average of $1.34m, nearly 10 times the average of $165,000 for the rest of the group’s employees. • And average compensation cost per front office employee (about one third of the total staff) was $596,000. That was more than four times the average compensation cost per member of support staff of $132,000 (€99k or £80k), which is still high in relative terms, but much closer to most people’s frame of reference. • 9 Bank$1$ Bank$2$ Bank$3$ Bank$4$ Weighted$ Bank$5$ average$ Senior staff (MRTs) as a % of total staff at the firm: 8.1% 3.0% 0.9% 0.8% 1.8% 1.1% 1.0% Bank$6$ 0.5% Chart$15:$The$distribu=on$of$pay$to$senior$staff$

"Distribu/on"of"pay"for"senior"staff"at"banks"earning"more"than"€1m"in"2014" " 14" 12" 10" Pay$€m$ • This concentration is most visible at the very top end. Chart 15 shows the distribution of pay for nearly 4,000 staff at 18 different banks who earned more than €1m in 2014. The top third of them shared half of all bonuses paid to senior staff. IB$1$ 8" 6" 4" 2" 0" 150 1000 No.$of$staff$earning$>$€1m$ 2000 3947 Chart&16:&The&tyranny&of&averages&& &Breaking$down$average$pay$per$employee$at$one$European$investment$bank$in$2014$ $$000$ $ 1336$ 596$ 283$ 233$ Comp$cost$ Awarded$ per$ pay$per$ employee$ employee$ 165$ Awarded$ $$$Awarded$ pay$per$ pay$per$ senior$staff$$ non;senior$ staff$$ 132$ Comp$cost$ Comp$cost$ per$front$ per$support$ office$staff$ staff$ www.newfinancialeu