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Morning Coffee: JPMorgan’s bonuses might increase 5x. Goldman Sachs' might increase 12.5x. A London banker wants to take on the USA and save the world

The Brexit bonus is baaack at JPMorgan. The bank has decided to take advantage of the UK’s changed legislation to allow the payment of bonuses up to ten times basic salary to material risk takers (senior staff) at its London operation (compared to two times under the old EU-derived regulations).  It’s similar to, although subtly different from, the policy change already made by Goldman Sachs, and it suggests that JPM might have slightly different priorities and strategy to its rival.

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Goldman’s move happened in the context of a decision to bring UK bankers into a “consistent global pay framework”.  For Managing Directors (MDs) at Goldman Sachs in London, the Financial Times reports that this that meant a hitherto unreported and presumably dramatic cut in the basic salary (to bring them into line with New York), combined with a maximum bonus/base ratio of 25 times (which would be necessary to maintain total compensation at the high end). 

JPMorgan is taking a different approach. It seems not to be going for full harmonization with New York; the ratio of bonuses to salaries is a mere 10:1. The implication is that while Goldman Sachs' bonuses could now increase 12.5 times, JPMorgan's will only increase up to 5 times.  Unlike at Goldman, Bloomberg reports that JPMorgan’s UK bankers will not be seeing big immediate cuts in basic pay. And JPMorgan’s US bankers temporarily posted to London will get to keep some of their ”role-based allowances” and other basic-equivalent compensation.

According to the company, this is “one of the most attractive and balanced pay structures in the industry”, and “fixed pay will very competitive”; the implication is that the bankers preferred it this way.  It seems reasonable to surmise that housing costs are part of the story; at the high end, London is an even more expensive market than New York, and while banks like to keep their rainmakers “lean and hungry”, someone who is worrying about their mortgage payment every month is going to find it hard to concentrate on deals.

JPMorgan might be a little better placed to offer this kind of generous fixed pay structure than other banks.  When revenues are volatile, it makes sense to do as much as you can to make costs flexible – this is why boutiques often pay extremely low basic salaries.  Because JPM has such a big and stable retail and commercial banking business, it doesn’t need to worry as much about the investment banking market cycle affecting its ability to pay dividends and spend huge amounts on technology.  The European bonus cap wasn’t as much of a hardship for JPM as it was for purer-play investment banks, so it has less pressure to move back to a full US-style compensation model. JPMorgan may derive a hiring advantage in the London market as a result. 

On the other hand, bankers are fundamentally dreamers. Many in London will relish the opportunity to earn a higher bonus.  On that basis, it might be guessed that Morgan Stanley will do something similar to Goldman Sachs, Bank of America will be more likely to follow JPMorgan, while Citi – which is intrinsically a big stable bank, but which might want to prioritise cost flexibility at the moment – might go either way.

Elsewhere, Rhian-Mari Thomas, a former leveraged finance banker with Barclays, now thinks that she, and people like her, might be the UK’s secret weapon when it comes to transitioning to the low-carbon economy. She’s in charge of the Green Finance Institute, a government-backed agency that’s trying to create innovative financial products based around green tech.

The idea seems to be that the USA has allocated $369bn of tax credits for green investment – poor old Britain doesn’t have anything like that much money, but it does have a lot of tricksy (and up until recently, under-employed) bankers.  And if your bankers are sufficiently ingenious and hardworking, you can make your own equivalent of investment credits.

It's a possibility.  So far, the Initiative has launched a fund concentrating on EV charging infrastructure, with more to come in the fields of domestic energy efficiency and sustainable aviation fuel.  They’re hoping to generate the kind of performance track records that will entice bigger mainstream investors to join the party in much bigger size. 

Further out into the future, they’re proposing that the government can do even more to catalyse private sector investment, by providing guarantees to lower the risk.  That might sound like the taxpayer taking all the downside but missing out on the upside but come on – when was the last time something designed by British bankers needed an expensive public bailout?

Meanwhile …

How serious a #MeToo problem does the City of London have?  It can’t be considered a great sign that when the FCA sent out a survey to 1000 banks and brokerages, 261 of them completely failed to respond and a further 36 asked for extensions. (Bloomberg)

Apparently, 68% of investment banks waste up to a quarter of their IT budget on software that hardly anyone uses.  This is typically a result of someone having asked for a product, entered into an automatically renewing licence agreement and then moved job. (Retail Banker International)

Many LP agreements between investment managers and their clients allow for travel and legal costs to be charged to the client.  As you might expect, this means that that the investment managers take a lot more private jets than they might have if they were picking up the tab themselves. (Institutional Investor)

A piece of research to store up for when the right person annoys you – German professors find evidence for the “Napoleon Effect”, as short soccer referees tend to give harsher penalties against taller players. (Research Gate)

Matt Barrett, of technology consultancy Adaptive, thinks that the equity market is about to go through another revolution as fundamental as the invention of high-frequency trading.  Among other things, he points out that if the big tech companies manage to get everything moved into the cloud, the “low latency” strategies to locate your server nearest to the exchange will be obsolete. (Financial News)

A lawyer in Arizona thought that bringing private equity capital into his industry would lead to lower fees, higher professional standards and charitable benefits. Guess how that worked out? (Business Insider)

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AUTHORDaniel Davies Insider Comment

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