U.S. banks pay 25% more on Wall Street. And that's a problem
Global search firm Options Group has completed its compensation and bonus survey for 2019-2020. The results confirm that most people in markets businesses will be lucky to get higher bonuses this year.
On Wall Street, Options Group is predicting equities bonuses will fall 9.5%, with cash equities down 10.5% and equity derivatives and prime finance down 7.1%. It says that only credit and securitized products will be up, and then by a negligible 2%.
In EMEA, Options is predicting cash equities bonuses will be down a more dramatic 15%, with equity derivatives down 10% and prime finance down 5%. It says most people in fixed income currencies and commodities (FICC) are likely to see EMEA bonuses fall too.
And in Asia, Options is predicting a 2% drop in fixed income bonuses, and a 12% drop in bonuses in Asian and Japanese equities.
The coming bonus round may therefore be nothing to get excited about. “The big takeaway globally is that fixed income has done better than equities,” says Mike Karp, Options Group CEO. “In the U.S., the only areas that will be paid up this year are credit and mortgages. Everything else will be flat to down.”
Options Group's survey doesn't discriminate between bonus forecasts at U.S. and European banks, but Karp says this year's bonus round is likely to continue the trend for U.S. banks' superior generosity. While European banks globally are constrained by European Union rules preventing them from paying bonuses greater than 200% of fixed pay (salaries), U.S. banks can still pay bonuses as high as they like. As a result, Karp says major U.S. houses on Wall Street still pay senior staff bonuses that are three or four times their salaries. The issue doesn't arise in London, where even U.S. banks are bound by the European bonus rule.
The differential on Wall Street has an impact on total compensation. “People at U.S. banks in New York can make 20% to 25% more than people at European banks," says Karp. "European banks have a high-salary-low-bonus model which can make it difficult for them to compete. As a headhunter I get a lot of calls from people in European institutions who want to work for U.S. banks.”
By skewing compensation towards salaries, Karp says European banks on Wall Street lose out on high-performing staff who are confident they can bring in business. "The more aggressive and ambitious people typically want to work for U.S. institutions because they know they can achieve more upside in their pay. If you’re a 32 year-old upcoming star, you’d rather have that period of your career at a U.S. bank than a European.”
As a result, European banks on Wall Street risk a downward spiral of less aggressive staff and lower revenues, which in turn impact their ability to pay the high fixed costs associated with their big salaries.
Karp says Europeans are being saved, however, by the general malaise surrounding Wall Street recruitment. “The problem is that few U.S. banks are hiring. It’s not like 2004 when you had a lot of banks trying to take market share. Nor is it like 2011 when everyone wanted to build after the financial crisis. Instead, the pressure is on to cut managing directors and to focus on VPs and directors and below.”
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