New Financial

Feeling the squeeze? – report on pay at asset managers and investment banks

February 2015 • Topic: Getting pay right • by William Wright

Pay at investment banks has been falling since the financial crisis, but it’s been rising steadily at asset management firms for the past decade. While staff at investment banks are taking a shrinking portion of a shrinking pot, asset managers are taking a constant portion of a growing one – with potentially significant consequences.

Download the full report here

‘You should never confuse the size of your talent with the size of your pay cheque,’ said Marlon Brando – who had taken enough dud roles to know the difference between the two.

That distinction is not always clear in the emotive debate over pay in the financial markets, not least because so much of the debate takes place in the dark.

The latest report by New Financial is an attempt to cut through some of this confusion, put some hard numbers on what has been happening to pay at investment banks and asset management firms over the past decade, and help navigate some of the inconsistent and often misleading disclosure from the industry.

The report shows:

* Pay at investment banks has fallen by more than a quarter since before the financial crisis – but the rate of decline has slowed and last year average pay per employee increased slightly.

* Pay is still very high compared with the real world. Average compensation cost per employee at investment banks of $288,000 (an imperfect but constant proxy for pay per employee) last year translates into actual pay of about $245,000 (€185,000 or £150,000), That’s six times median full-time earnings in the UK and just above the level of earnings needed to qualify for the top 1%.

* The fall in pay marks a step change in the economics of the industry. Pay has fallen from roughly half of revenues at investment banks in the five years before the crisis to around 40% since. As a result, profits in 2013 were more than 50% higher than they otherwise might have been.

* Not everyone in the industry is feeling the pain: average pay per employee at asset management firms has increased by one fifth to $263,000 since before the crisis and has been rising steadily for the past decade. Pay in asset management used to be half the level of investment banks. Last year it was more than 90%.

* There is a huge concentration of pay at the very top. On average, between one quarter and one third of the bonus pool at investment banks is paid out to just 1% of the staff.

* The increase in pay for asset managers is less than the increase in their productivity over the past decade. And the decrease in pay at investment banks reflects the fall in individual productivity (in real terms) over the past 10 years.

* Asset managers and investment banks could significantly improve the division of reward between staff and shareholders. There is significant scope for further reductions in pay and staffing across the industry, and for sharing some of the efficiency and scale gains of the past decade with clients in the form of lower fees.

* At the same time, there is a huge opportunity for the industry to improve the level of disclosure and transparency around pay to help defuse the debate.

Getting pay right

In banking and finance, the question of pay and bonuses is not just about the numbers. Instead, it is an important barometer of the shifting balance in how the capital markets industry thinks about itself in relation to its shareholders, to its clients, and to society.

At New Financial, we believe that getting pay right is an essential part of the industry’s rehabilitation and we are organising a number of events and reports on ‘Getting pay right’ to help change the direction of debate.