US bankers’ bonuses to dwarf those in Europe
US bankers’ pay rewards could outstrip their counterparts over the pond by 20pc, and the gap is set to grow,
EUROPE’S top bankers are on course to fall further behind their US rivals as Brexit uncertainty, low volatility and rising shareholder pressure drag down bonuses, City experts warn.
Traders are already preparing for double-digit falls in bonuses after low volatility made it difficult to make money in 2017. Headhunters warn that those at European banks are more likely to be handed a “doughnut” bonus – industry code for nothing at all – in the coming months as revenues continue to lag US peers.
Jason Kennedy, chief executive of recruitment firm Kennedy Group, said the chasm between US and Europeanbased banks would be wider than ever as European banks held back cash due to political uncertainty.
He predicts bankers on Wall Street will be handed bonuses 15-20pc higher than those at European rivals this year, or 10-15pc more for those working at a US bank based in Europe.
That will differ by division, with US merger and acquisition (M&A) bankers in for the biggest windfall after the number of Us-targeted deals reached a record high of 12,891 during 2017, according to Thomson Reuters.
Wall Street banks dominated the league tables for both European and US M&A last year, with Dealogic ranking Goldman Sachs, JP Morgan, Bank of America Merrill Lynch and Morgan Stanley as the top four advisers by market share on both sides of the Atlantic.
EY’S Omar Ali said Donald Trump’s sweeping tax reforms would only “heighten the differentials” in the year ahead. “Being a banker in the City and being a banker on Wall Street are only going to become more stark,” he said. “If you look ahead, given the US Tax Cuts and Jobs Act going through, Wall Street is likely to get even stronger.”
The post-brexit drop in the value of the pound, meanwhile, has failed to convince foreign firms to take over UK rivals, with Dealogic data showing that the value of takeovers dropped to its lowest point in four years.
Envy, says one Wall Street banker when asked for his bonus predictions, is a corrosive emotion. It is a feeling that will run through the City in the months ahead as the world’s largest banks hand staff their all-important bonuses. A key part of the financial calendar, headhunters expect the payouts to expose the widening gap between European and US investment banks as Wall Street giants tighten their grip on the lucrative advisory market just as trading desks face a slump.
Bonus day is now dominating the agenda in the City as senior executives at major banks scrabble to finalise the numbers ahead of full-year results. City recruiters say M&A dealmakers are most likely to be rewarded, while trading desks are expected to suffer the most after low volatility prevailed in 2017 despite a general election, two Budgets, an interest rate rise and the triggering of Article 50. Those at a European bank are most at risk of disappointment – headhunters warn their numbers could be up to 20pc lower than their US peers this year.
“If you’re looking at payouts in North America versus Europe, I’d say the former will pay 15-20pc more [than European rivals],” says Jason Kennedy of London headhunter Kennedy Group. “At US banks within Europe, senior bankers will likely get 10-15pc more than their European counterparts.”
Some traders may get “doughnuts” in this bonus round, he says – referencing an industry term for getting nothing at all. The twinge of envy as rivals cash in on bigger rewards has become a familiar one at this time of year, with doughnuts traditionally being read as a polite request to leave. That has changed slightly in recent years, with senior bankers at Deutsche Bank last year told they would get zero amid poor performance, a multi-billion dollar legal bill, shareholders left without a dividend and thousands of job cuts. “Being a banker in the City and being a banker on Wall Street are only going to become more stark,” warns EY’S banking expert Omar Ali.
“If you look ahead, given the US Tax Cuts and Jobs Act going through, Wall Street is likely to get even stronger. The tax on cash that US multinationals have overseas is going to get treated in a way that could stimulate economic growth [and could create] a big M&A boom. For me 2018 will just heighten the differentials.”
Bank of America has already handed 145,000 Us-based staff a $1,000 (£744) cheque off the back of Donald Trump’s new tax plan, for example, with boss Brian Moynihan firing out an upbeat memo before Christmas claiming the extra reward was in the “spirit of shared success”.
The message stands in contrast to the ones received by those working at most European banks, which are unlikely to benefit from Trump’s sweeping reform in the same way and have struggled to snatch market share in the US.
“Profits are noticeably higher in the US and bonuses tend to track profits,” says Douglas Mcwilliams of the Centre for Economics and Business Research (CEBR), adding that City bonuses have fallen from a high of £12bn in 2008 to less than £4bn since the financial crisis.
“Also there is more political concern about inequality on this side of the Atlantic, which tends to get reflected in governmental and shareholder pressure on bonuses. People over here are escaping from scrutiny by increasingly setting up boutiques where they get dividends rather than bonuses.”
Although bonus season is typically shrouded in secrecy, with bankers left second-guessing if they’ve been hard done by, the under-pressure bosses of Europe’s banks have made no secret of the fact that this bonus season will be underwhelming.
Credit Suisse chief Tidjane Thiam, who agreed to a 40pc cut in his own bonus earlier this year, said in November that staff should not expect “anything spectacular” in their bonuses this year. The investment banking boss of Barclays – which is facing a £1bn hit from Trump’s tax Bill – said around the same time that this year’s bonus round will be about “differentiation”, suggesting payouts for those in poorly performing units will fare far worse than they might have done in previous years. And while sources say Deutsche Bank chief John Cryan is going to make good on his promise to “return to our normal compensation programmes” this year, the rewards are unlikely to be meaty given shareholder patience is wearing thin over the sluggish turnaround of its investment bank. “The pressure will definitely mount on the management board if they don’t deliver a decent figure [in its full-year results],” says Ingo Speich from Union Investment, one of the bank’s top 20 shareholders.
Shareholders are increasingly concerned that US banks dominate in lucrative areas such as M&A, a key money-spinner for investment banks with activity expected to grow. As well as governing the market back home, where the number of M&A deals climbed to a record 12,891 during 2017, according to Thomson Reuters, the US titans Goldman Sachs, JP Morgan, Bank of America Merrill Lynch and Morgan Stanley all topped the league tables for European M&A activity last year, according to Dealogic. Their dominance is impacting on European banks’ ability to retain talent – one City headhunter said advisory bankers in London will now “only move for a US house” in a race to get to the top of the food chain.
“There’s no doubt the big players in the US have seriously outperformed the rest,” adds Vicky Pryce of CEBR. “A number of the European banks are still not paying dividends so you can’t justify big bonuses. [There is also] regulatory control of bonuses in Europe, the gulf is appearing partly because of that. Nevertheless the concern for EU banks operating in any financial centre is that they can lose their people to others who don’t have the same issues with granting bonuses.”
While Bank of England Governor Mark Carney hinted that Britain could review the cap on banker bonuses after the UK leaves the EU, a suggestion lawyers say is dependent on what the UK’S future trade deal is on regulatory alignment, European banks will need to significantly up their game if they want to tear back market share from American rivals. Envy of others’ success might be a necessary ingredient to spark action.
Outside the New York Stock Exchange, top; London’s Canary Wharf, above Contrasting fortunes on either side of the Atlantic £317k median bonus for MDS, Wall St 2017 121pc of salary median bonus vs median salary for MDS, Wall St 2017 $1.4tn M&A activity, US 2017 £247k median bonus for MDS, City 2017 93pc of salary median bonus vs median salary for MDS, City 2017 $856.3bn M&A activity, Europe 2017