comp

It’s probably good news that “European Union finance ministers reached a landmark deal early Thursday that would bring many of the continent’s banks under a single supervisor,” but of course it wouldn’t be Europe without some self-evidently bad ideas for financial regulation, so today we also get this:

Bankers’ bonuses in Europe would be capped at two times fixed salary under a tentative EU agreement that would mark the most severe crackdown on pay since the 2008 financial crisis.

The European parliament and negotiators for member states drafted a deal in Strasbourg on Thursday that imposes a 1:1 bonus to salary ratio, which can be increased to 2:1 with the backing of a supermajority of shareholders.

Still being negotiated, can change, etc. One could perhaps imagine that once there’s a single eurozone banking supervisor, the warm glow of supervision will shield eurozone banks from this sort of chaotic meddling from the European parliament. Or not, who knows.1

This is mostly bad for the usual reasons: keying bonuses to base salary, without capping base salary, increases fixed costs and thus risk, while reducing bankers’ incentives to actually do a good job at whatever they’re supposed to be doing. A first-best comp scheme would probably involve huge bonuses to reward bankers for doing the things you want them to do; smaller bonuses is perhaps a better scheme than huge bonuses to reward bankers for doing the thing you don’t want them to do, but it’s not a particularly impressive approach. Read more »

I like reading banks’ research reports on other banks these days because they give off a certain the-call-is-coming-from-inside-the-house vibe; you imagine the analyst running the numbers, looking them over, and saying “my God, this can’t be right, can it? This seems to say … I’m fired?” JPMorgan’s analysts maybe suffer from this less than most but it still imparts a certain tension to the marvelous, strange, 100-page research note out of J.P. Morgan Cazenove today about global investment banks.* There are two big important points** which are:

(1) European banks are pretty pretty aggressive with how they risk-weight their risk-weighted assets, especially compared to US banks. Basel’s Standards Implementation Group is moving in the direction of requiring convergence on RWA measurement, and JPM thinks that that will lead to the European banks having to revise their RWA measurements – meaning that those banks’ capital positions will look much worse than they do now and they will need to shed RWAs and/or raise capital.

(2) You can quantify the return-on-equity effects of new banking regulation – including Basel RWA convergence, but also things like derivatives clearing, the Volcker Rule, etc. – on the big global banks, and those effects are bad. Bad for shareholders, anyway: per JPMorgan, global-bank average ROE would be 16% in 2013 but for those regulations, while after giving effect to them it will be just 6.3%.

But I presume that like any good utility maximizer you care only about your comp, so the important takesaways are (1) 6.3% is not good enough and (2) it will be remediated out of your pocket. Which leads JPMorgan into the truly chilling: Read more »

Sorted by class year and review ranking.* Investment banking division only, sadly. Source is a LEH bankruptcy document, sent to MDs in December 2007 to prepare for comp communication. Dealbreaker’s army of analysts inputted and scrubbed the data. Enjoy these numbers, you will not look upon their like again.

Average pay and benefits across Lehman’s 28,600 employees in 2007 was $331,958. Average pay for the top 50 people at the bank was a shade under $14mm, meaning that you could have paid the 677 worker bees at the investment bank twice over with the amount spent on the top 50 at Lehman over all.

(Update.) Oh let’s just start with a chart. Number of bankers (IBD only remember) for each class year, and median pay for that year:

Now the specifics. Associates – 330 associates (other than class of ’07, who got a uniform stub bonus paid in stock) averaged $311K each, with a max of $600k and a minimum of $110K for the worst-reviewed. Data below (other than totals on the right, $ in thousands, counts are # of employees at that rank / class year / review category): Read more »