In the past few days, major global banks have taken the axe to pay with unusual zeal. JPMorgan slashed the compensation of CEO Jamie Dimon, one of the world’s top bankers, by half despite record earnings in 2012. His crime? Being in charge when an investment unit ran amok with the botched “London whale” derivative trades that cost the bank more than $6.2 billion.
Goldman Sachs Group, which is known for handing out some of the most lucrative pay packages on Wall Street, paid just 37% of its 2012 adjusted revenue to employees — the second-lowest proportion since the Wall Street firm went public in 1999.
Earlier this week, sources said Barclays and Deutsche Bank plan to cut banker pay by up to 20%, while Morgan Stanley took the unusual step of deferring 100% of 2012 bonuses for high-earning employees. Morgan Stanley bankers and traders got word directly from their managers on Thursday, which one employee characterised as “bonus day, if you can even call it that anymore”.
Wall Street employees might have to get used to that. Investors and analysts believe lower compensation is here to stay for some time as firms face unprecedented challenges, in some cases forcing them to fundamentally rethink how they operate. New regulations make many businesses on Wall Street less profitable and sometimes even impossible.
With tens of thousands of jobs shed in the past few years, bankers and traders have trouble demanding more money. Banks are also replacing employees with automated systems in areas such as bond trading, which reduces staffing.
“I hate this phrase, but I think their compensation levels at this point are the new normal,” said Michael Cohn, chief investment strategist at Atlantis Asset Management, which owns Goldman Sachs shares. “The world isn’t going back to the way it was anytime soon.”
If Wall Street employees are the losers from these pay changes, there are some winners, as well. “It’s a good trend for the stocks and for investors,” said Mark Morgan, senior analyst at Thrivent Asset Management, which oversees more than $80 billion in assets. Less money for employees means more for shareholders. “It’s tougher to justify the expense if revenues aren’t there,” Morgan added.
Oppenheimer analyst Chris Kotowski called Goldman a “textbook example” of how banks can boost profitability even in a difficult business environment by cutting employee pay. “It is simply not an option for bank managements to earn non-competitive returns in the long run,” he said.
Goldman’s return on equity for the quarter — a measure of how well the bank turns shareholder funds into profit — was 16.5%, nearly triple its level in the same quarter a year earlier.
There are some sceptics who say it is too early to declare the arrival of a new era when it comes to Wall Street pay. After all, they point out, banks are only taking drastic steps after punishing investors with weak returns for the past few years.