Despite Record Year, Wall Street Firms Refuse To Hike Banker Pay

Two days ago, when reporting on Goldman’s blockbuster Q4 earnings report (and again, the the next day with Morgan Stanley just as impressive results), we pointed out that even as bank revenues soared on the back of the pandemic profit bonanza, employee comp was in fact declining and was, at best, flat, saying “higher bank revenues and much lower comp: this is the end of an era for  bankers/traders who used to share in firm upside”

Goldman Q4 revenue up 27% Y/Y to $11.7BN while operating expenses down 19% Y/Y, on “lower compensation and benefits expenses”

Higher bank revenues and much lower comp: this is the end of an era for ibankers/traders who used to share in firm upside

— zerohedge (@zerohedge) January 19, 2021

We were confident some major financial outlet would promptly piggyback on this observation, and this morning Bloomberg did not let us down, and in a report titled “Wall Street Gets Frugal With Employees After Pandemic Windfall”, it wrote that despite what turned out to be a record year for most top banks, “average pay per employee rose $271 at top U.S. banks last year” and “even where revenue soared, compensation costs rose much less.”

To be sure, ahead of Q4 earnings there were conflicting reports with some predicting a decline for traders and dealmakers, in some cases as much as 30%, while others expecting a modest increase for top performers (especially among for hedge funds), but now that the results are in, it’s not pretty. Quote Bloomberg:

Deluged by client orders and often working from home, Goldman Sachs Group Inc.’s workforce generated 15% more revenue per employee during the tumult of 2020. But as the year wound down, the firm had spent an average of just 2% more on each person.

Inside JPMorgan Chase & Co.’s investment bank, revenue per employee surged 22%. The figure for pay: up 1%.

Then again, perhaps it’s just a case of lumping all bankers within the same compensation line. To be sure, few big U.S. banks disclose figures revealing how they compensated Wall Street-oriented workforces, and especially when it comes to compensation broken down by various segments. And while it is very likely that the superstar traders and rainmakers will get a raise and/or generous year-end bonuses, the prevailing image across banks was one of surprising pay restraint:

Earnings reports in recent days underscored anew how hard 2020’s tumult battered other business lines such as lending, where banks stockpiled tens of billions to cover bad loans. Despite the flurry of activity on Wall Street, total revenue at the nation’s six banking giants was little changed last year. The group boosted average pay per employee by a mere $271.

One possible reason for the stingy comp is that these same firms that enjoyed a bumper year thanks to the covid lockdowns – which left millions unemployed – are bracing for tougher times in Washington, where Democrats “skeptical” of large financial-industry paychecks are ascendant. As Bloomberg notes, “from President Joe Biden’s recent picks of veteran watchdogs — such as Gary Gensler for the Securities and Exchange Commission and Rohit Chopra for the Consumer Financial Protection Bureau — to his focus on inequality, there are signs the industry faces both tougher scrutiny and regulation.”

The changing of the guard may further embolden lawmakers and other critics who want to publish more data on industry wages, curb pay for chief executive officers and restrict bonuses that could encourage risk-taking.

“The optics aren’t good right now for large payouts”, Mayra Rodriguez Valladares, a former analyst at the NY Fed who now trains bankers and regulators through her consulting firm, MRV Associates, told Bloomberg. “The more you reward the big lenders, the big traders, they take on more risk,” which would attract criticism, she said. Well, yes, but it would also attract bailouts so in the end everyone wins. Except taxpayers of course.

While we expect most bankers to be furious for not getting a substantial raise to match the surging revenue of their employers, the news should probably not be a surprise, and as Bloomberg adds hints “have been emerging for weeks that some banks would opt to keep a lid on compensation for Wall Street operations pulling in loads of cash, ending a years-long period in which revenue and compensation have generally moved by similar degrees.”

By late November, Bank of America Corp. executives were discussing proposals to keep its bonus pool for sales and trading at the prior year’s level. By December, Citigroup aimed to leave its overall pot unchanged for equities, while boosting it for bond traders by at least 10%. More-generous increases approaching 20% were under discussion in Goldman Sachs and JPMorgan, but even there, the thinking was that moves would vary widely.

In the end, however, the news was bad with Goldman’s earnings showing the firm cut the share of revenue it spent on compensation to 30% last year, down from about 34% or more in the prior three years. At JPMorgan’s corporate and investment banking division the ratio fell to just 24%, down from 28% in those earlier years. Morgan Stanley also shaved two percentage points off its compensation ratio.

Asked about the drop in comp, Goldman CFO Stephen Scherr said that “our philosophy remains to pay for performance, and we are committed to compensating top talent. Our full year compensation ratio is at a record low, reflecting the operating leverage in our franchise. As we have said in the past, we view the compensation ratio metric as less relevant to the firm as we build new scale platform businesses.”

As Bloomberg concludes, the last time revenue growth and compensation growth diverged so wildly was in 2009, when Wall Street earnings rebounded from the 2008 financial crisis amid a withering public backlash against the industry’s pay practices. Critics of the industry’s excesses have kept a close eye on bonus trends ever since although Wall Street promptly resumed its generous ways as the post-GFC recovery continued on the back of QE1, QE2, QE3 and so on.

Ironically, the 2010 Dodd-Frank Act set the stage for stage for much heavier regulation of executive compensation, but several of its key rules were never fully adopted by the Obama administration (which, as a reminder, received generous donations from Wall Street). The prohibition on incentive-based payment arrangements that can encourage inappropriate risk-taking by bankers still hasn’t yet been finalized. And while some major banks have voluntarily instituted clawback provisions since the 2008 crisis, few have used them.

That may change now: Rodriguez Valladares expects policy makers will pay more attention to the gaps in pay between senior executives and employees on the lower rungs.

“Where legislators can play a very good role is to say: ‘Well hang on, you’re getting paid 100 times more than your teller, why is that?’” she said. “‘And you’ve been underpaying these people, so pay them more.’”

That’s one angle; the other is that with much more scrutiny on Wall Street pay now, bankers – who used to leverage potential job offers from competitors – will now be stuck, both at home and in the current position since few others can offer generous pay raises, certainly not the hedge funds who are shuttering left and right as they continue to underperform not only the market but the average 16-year-old Robinhood trader.