Morning Coffee: Bonus angst strikes Barclays. Beware becoming a managing director
Amidst fears about the potential emergence of a pandemic virus in China, concerns about bonuses at Barclays' investment bank might seem a little trivial. If you work for Barclays, however, the size of the bonus that comes your way around Valentine's Day is probably your primary concern and prime distraction.
Last Friday's messages from unnamed Barclays 'people familiar with the [bonus] plans' at the bank are therefore likely to have spoiled your zen. Despite a great third quarter, it seems bonuses won't be flowing freely at Barclays after all. One unnamed source told the FT it's time for a "grown-up conversation" about curtailing bonuses to make sure returns actually exceed the cost of capital. Another said Barclays' people won't get "slaughtered" but that the fall in their bonuses will be "noticeable" and that they had it coming anyway after ex-head of the investment bank Tim Throsby increased pay significantly in 2018 to compensate for the fact that Barclays underpaid the year before that. This, then, is just a return to the old (underpaying) norm.
It seems that CEO Jes Staley is to blame for the return to parsimony. Staley has pinned his reputation on achieving a group return on equity of 9%, so Barclays' 5.7% RoE in the first nine months of 2019 will have been a disappointment. The CEO's instinct for curtailing compensation was already conspicuous in October, when his message that compensation was a "variable" that can help drive shareholder returns seemed at odds with CFO Tushar Morzaria's claim that Barclays was a "pay for performance business" where returns targets are "waymarkers" rather than hard-lines. Barclays would do, "the right thing by managing the company for the medium term rather than for the short term for the sake of it,” said Tushar in October, suggesting that if performance merited pay then pay would surely follow. Not any more.
Is this short-termist? Will Barclays' lose 'talent' as a result. Maybe not. The FT says Barclays is thinking of cutting bonuses by the 'mid-teens' in percentage terms, that Europe will suffer more than the U.S. and that staff above VP level will suffer most of all. Given that bonuses at Deutsche Bank might be down 30% and that HSBC is widely expected to stiff senior European bankers, Barclays might even end up seeming generous compared to other Europeans.
Barclays can probably get away with disappointing some of its more highly paid members of staff. In 2018, its average 'material risk taker' (typically a senior trader, banker, or manager) earned $1.4m, compared to $1.2m at HSBC global banking and markets. Moreover, 430 people at Barclays earned over £1m and sixteen earned over £5m in 2018, compared to respective figures of 323 and five in 2015 when Jes Staley arrived. It helps, too, that Barclays has dispensed with a previous policy of deferring 100% of all managing director bonuses, and only deferred 100% of bonuses above £1m for the past two years.
The danger for Barclays will come in the U.S., where the bank's Lehman heritage means its people are far more likely to compare their bonuses to those on offer at American banks than to pay at Europeans. Goldman Sachs and JPMorgan pay material risk takers $1.5m in London and probably more on Wall Street. They also have far more very high earners (especially at GS). If Barclays wants to keep its American bankers and traders happy, U.S. compensation can only be squeezed so much. It could be a painful year in London.
Separately, the New York Times has a warning for anyone who just got promoted to managing director (MD) in an investment bank. While the big new salary ($400k - $600k) might seem cause for celebration. the NYT notes that it can cause problems. - Most people who get a raise end up spending far too much and saving far too little. Their lifestyle improves to accommodate the raise and they don't consider that if they want to maintain that standard of living in retirement, they need to up their pension accordingly. It's worse for women: when you get promoted into a senior role, you're more likely to get divorced.
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