Wall Street Traders to Take Home Smaller Slice in a Banner Year
Wall Street Traders to Take Home Smaller Slice in a Banner Year
(Bloomberg) -- After propping up the profitability of banks during a tumultuous year, Wall Street traders will get a slice of the windfall they’ve brought in. It’ll just be a smaller slice.
In earnings reports this week, the biggest financial firms began to signal how they’ll navigate rewarding traders for producing banner results at a time when unemployment has soared and other bank divisions are struggling.
The largest Wall Street firms have so far set aside $6 billion more for compensation and benefits this year than they did in the first nine months of 2019. But compensation ratios -- the percentage of revenue banks set aside for compensation, a key measure of how they pay employees -- dropped at some lenders.
“It becomes challenging to completely walk away from the previous compensation philosophy,” Brennan Hawken, an analyst at UBS Group AG, said in an interview. That’s especially true, he said, in “a year where people are that busy and working all the time, even if they’re doing it from their pajamas in their living room.”
While Morgan Stanley’s compensation ratio for its traders and investment bankers improved slightly, to 36%, at Goldman Sachs Group Inc. it fell more than 200 basis points to 33%. Inside JPMorgan Chase & Co.’s corporate and investment bank, the ratio dropped 4 percentage points to 26%.
That comes on the heels of traders at Wall Street’s five biggest banks adding $24 billion more to their companies’ coffers in 2020 than they did a year ago. The performance was enough to boost overall revenue 4.4% in the first nine months of the year, to $280.9 billion, countering the effects of the lower rates that crimped interest income across the industry.
‘Excellent People’
“We are always thinking, based on the information we have at the time, what do we think is necessary to pay our people competitively and protect our franchise?” Goldman Sachs Chief Executive Officer David Solomon said this week. “We have excellent people in a number of businesses that need to be paid when people perform.”
It’s a sticky situation for banks: They’ll want to reward traders for the massive revenue gains they’ve produced -- while mostly working from home -- to retain that talent. But those increases come in a year when joblessness has surged and the lenders have had to set aside more than $50 billion in reserves to cover souring loans. And it’s an election year, with U.S. politicians known for attacking bankers’ bonuses.
“We’re obviously accruing expenses in line with the revenue performance,” Citigroup Inc. Chief Financial Officer Mark Mason said this week on a conference call with journalists. “We’ll factor all the things that you’d expect us to factor in as we come to making a decision -- including the environment we’re in.”
Higher Pay
The average annual salary for employees in New York’s securities sector is almost $400,000 -- five times the typical pay for other private-sector workers in the city -- and the industry’s average bonus rose 3% to $164,100 last year, according to the state comptroller’s office.
The securities industry makes up less than 5% of private-sector employment, but its wages account for one-fifth of total compensation for the sector in New York City. Earlier this year, the comptroller warned that bankers’ bonuses are likely to fall sharply this year.
Internally, banks may be eyeing compensation costs -- typically the largest portion of non-interest expenses for lenders -- as an area for cost cuts in a year when profits have been reduced by more than a third.
“If you’re a bank management team, you just have to be trying to look for opportunities to cut expenses right now, and I think compensation and real estate are probably the lowest-hanging fruit,” said Jim Shanahan, an analyst at Edward Jones. “Overall expenses will be targeted, but compensation in particular will be targeted in the fourth quarter.”
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