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Bonuses to Disappoint Bankers After Banner Year for Finance

Bloomberg logoBloomberg 2/20/2021 Lananh Nguyen

(Bloomberg) -- After a stellar year for trading and dealmaking, European bankers are joining their American counterparts in learning their bonuses won’t be quite as impressive.

Credit Suisse Group AG, which contended with major legal hits and writedowns last year, reduced its bonus pool by about 7%. Deutsche Bank AG will boost bonuses for its traders by more than 10%, but it was forced to scale back an initial plan to increase annual payments by roughly a third after the European Central Bank objected.

On both sides of the Atlantic, banks are seeking to exit bonus season with their top traders and investment bankers in place but without provoking the ire of regulators as a pandemic depresses the global economy. Banks have benefited from trading volatility and a surge in mergers and acquisitions, yet their consumer businesses have been hurt by worldwide lockdowns to combat Covid-19.

“Instead of banks compensating their employees well, the banks have sought to pay people just enough so they won’t leave,” said Paul Sorbera, president of Wall Street executive-search firm Alliance Consulting in New York. “It’s particularly been this way since the credit crisis. Covid was a global disaster. I never understood the irrational exuberance about prospective bonuses. It just isn’t the way banks operate any more.”

European regulators have been public in their demands to keep a lid on bonuses. Andrea Enria, who leads the ECB’s bank oversight arm, has called on banks to exercise “extreme moderation” on variable compensation to avoid eating into capital cushions, which have rebounded to record highs. The ECB and other regulators also argue that banks have only withstood the pandemic so well thus far because of massive support from governments and central banks.

The situation in Europe reinforces the modest expectations set by U.S. and Canadian firms. At Bank of America Corp., a flat bonus pool and policy changes on stock awards sparked anger among high earners. Citigroup Inc. left its overall pot unchanged for equities, while boosting it for bond traders by at least 10%. While bigger increases, with growth approaching 20%, have been discussed at JPMorgan Chase & Co. and Goldman Sachs Group Inc., payouts vary widely.

Read more: Traders Set to Win Spoils in Europe’s Uneven Bank Bonus Days

The problem for lenders -- and thus for traders and mergers-and-acquisitions bankers hoping for outsize bonuses -- is that, despite a windfall for Wall Street, total revenue at the six largest U.S. banks was little changed last year. While stocks soared and activity surged in capital markets, the pandemic cut into other business lines, such as consumer lending, with banks stockpiling tens of billion of dollars to cover souring loans.

Add to that the problematic optics of massive paychecks for bankers while workers in other industries continue to suffer from high unemployment as the health crisis lingers, holding back economic growth. Large bonuses could spark particular ire in the U.S. given that Democrats, with their long history of scrutinizing the finance industry, now control both houses of Congress and the White House.

Read more: Wall Street Gets Frugal With Employees After Pandemic Windfall

chart: By the Numbers © Bloomberg By the Numbers

The constraint in bonuses comes even as bank employees produce more and more for their firms. Goldman’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’s investment bank, revenue per employee surged 22%, while the pay figure was up only 1%.

It’s not just traders and dealmakers taking a hit -- restraint is affecting the C-suite as well. Citigroup curbed compensation for outgoing Chief Executive Officer Michael Corbat by 21% to $19 million as the bank faced consent orders from regulators, and BofA reduced CEO Brian Moynihan’s pay by 7.5% to $24.5 million. Both lenders cited the impact of the pandemic in considering compensation levels.

Goldman Sachs also cut CEO David Solomon’s annual pay, though that was for a different reason: It deducted a penalty for the bank’s 1MDB bribery scandal. Excluding the roughly $10 million Solomon was required to return, Goldman’s board kept his compensation for the year effectively unchanged.

North of the border, things aren’t looking much better for traders and dealmakers: Canada’s six biggest banks set aside 3.9% more for bonuses in the 2020 fiscal year, a relatively small increase. While that boost improved upon the previous year’s 2.5% gain -- the smallest in nine years -- it fell short of the 6.3% average for the past decade.

This year’s bonus distributions could lead to a game of musical chairs at the big banks. Wall Street firms often undergo staffing changes around this time of year anyhow, after bonuses are paid out, and the moves by top performers may be even more pronounced than usual should payouts prove smaller than expected.

Read more: BofA Treasuries Trader Leaves, Adding to Departures in Rates, FX

(Adds European regulator’s pressure in fifth paragraph.)

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