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02/29/2012

A Q&A with the Compensation Expert Who Thinks Banking Pay Could Fall Another 50% in Five Years


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EfinancialCareers

What’s happening with investment banking compensation? Are lower pay and higher deferrals really inevitable? We asked Jon Terry, remuneration partner at PricewaterhouseCoopers.

Q: Over the next five years, how much would you expect investment banking compensation to fall by—on average?

A: Two big factors are likely to influence compensation levels: profitability and the share of profits distributed to employees. If banks continue to de-risk, profits will fall. If shareholders demand a higher share of profits, pay will fall exponentially.

We’ve seen broadly lower levels of compensation as a proportion of profits over the past two years and this is likely to continue. This could result in overall compensation levels falling quite substantially—maybe by as much as 20 percent to 50 percent over the next five years.

Q: Is there any good news?

A: Yes. Pay could rise eventually.

Q: Why would that happen?

A: If banks ring-fence or separate their investment banking divisions, shareholders may accept higher investment banking compensation levels as the price to pay for their exposure.

Q: Come 2015, how would you expect the average bonus at a large bank to be structured?

A: Over 50 percent will be in deferred stock or instruments linked to the bank’s underlying long term exposure. This will apply at even modest levels of bonus and a higher proportion will be deferred at higher levels.

Q: What are the three biggest challenges facing banks in terms of compensation now?

A: Financial uncertainties are reducing profits. It’s difficult to identify the small number of truly alpha-generating employees. And there’s pressure from external stakeholders (media, regulator and government) on perceived appropriate levels of pay.

–Fred Yager, Editor, eFinancialCareers, North America

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