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Update on the Investment Banking Sector: Weak Performance, Soft Employment and Lower Total Comp

I didn’t get a chance to see the Margaret Thatcher movie over the past weekend, but I did see a pretty good Redbox movie called Margin Call, and a New York Times article – both of which I’m sure have received the attention of many on Wall Street. The movie was really good and I recommend it, but the article (“The Dawn of Lower Pay on Wall Street”) was stunning, considering that many economists I'm read and hear seem to think that we are out of recession and in at least a weak recovery.

Here is my own condensed, bullet-point version of the article in case you missed it or don’t want to read the whole thing:

- Michael Driscoll, a former Wall Street trader who is now a professor at Adelphi University said workers on Wall Street are … “being paid less and less. They're being pilloried in the press and by the 99 percent. Even Republican candidates are attacking [them]. People in the industry are being treated like pariahs.”

- “Overall compensation on Wall Street this year is expected to drop at least 30 percent, reflecting the dismal financial results reported this week…” Comment by me: I went to look up S&P performance for 2011 and found that while the entire S&P 500 was up for the year by just over 2%, the S&P 500 financial sector was off more than 18%.

- At a so-called ‘venerable' investment bank: “top executives, including the chief executive … and his management team, will receive zero cash.” In a regulatory filing last Friday, the bank CEO’s total compensation for 2011, including stock and deferred cash, was showing a 25% drop.

- Brian Foley is quoted in the article on the historic argument to pay nice bonuses even in down years in order to not lose employees. But that’s not happening this year. Foley: “The retention argument was always there, but it's tough to make that argument this year because much of the Street is down. Where are they going to go? People are cutting back or even eliminating investment banking. They're laying people off."

The article’s author concludes: “…virtually everyone I spoke to agreed that Wall Street pay, while still lofty, will be lower for the foreseeable future, and may never return to the heady days of 2007.”

I don’t think the point here is “pity the poor investment bankers,” (because they still make a lot of money) but instead to say that it seems like an overall pay for performance situation might have settled in on Wall Street – the sector was down around 18% and total compensation is down “at least” 30% according to this article. Another article I saw estimated that the financial sector lost as many as 200,000 jobs in 2011.

We have no way of knowing if this trend toward lower total compensation is just temporary or has longer legs, but it seems possible that there is something deeper and more structural going on here because it is being facilitated by huge job shedding and a very soft employment situation in what has traditionally seemed like a bullet-proof sector called investment banking. At a key point in the movie Margin Call, one of the characters said something like: "whether the markets go up or down, we still make money." But maybe it's not like that anymore -- errr ... or at least temporarily.

 

The opinions expressed are solely those of the author and do not necessarily represent those of WorldatWork.

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Mon January 30, 2012 11:36 AMReport Abuse
E Brennan
Senior Associate
Member Since: 4/19/1979
Comments: 590
 

Another article just emerged underlining the trends affecting law firms described above:http://online.wsj.com/article/SB10001424052970203363504577186913589594038.html?mod=WSJ_myyahoo_module.   

 
Wed January 25, 2012 11:55 AMReport Abuse
E Brennan
Senior Associate
Member Since: 4/19/1979
Comments: 590
 

Expecting economically sound decisions from media moguls is a questionable assumption.  For every twenty who correctly compute that an investment is terribly unwise, there will be one rich fool who will invest billions on something.  And one out of every ten or so of them will discover a way for the dumb investment to make them even richer.  Thus, I project that the ratchet effect in sports pay will continue, albeit slightly more modestly.

Global employment and worldwide total remuneration practices are so diverse, culturally based and essentially incomparable that even terms like "skill" and "cost" carry different meanings in each context.  So I won't even risk a guess on that topic without a lot more thought and research.  Let you try, instead, since it's your blog!

Wink

 
Wed January 25, 2012 9:06 AMReport Abuse
Ryan Johnson (Staff)
Comments: 462
 

Thanks for the comments. I have also read about the quiet manuverings at some big law firms vis-a-vis salaries that are affecting both associates and partners. It's not like it used to be in either investment banking or law.

Great anecdote about the EU company worrying about offshoring jobs to America. However, I still think the employer-based benefits system in the U.S. makes it difficult to compete head-to-head in the global labor market. I think labor will almost always flow to where worker skill is high and cost is low.

And your sports comment is also right on the money -- although, I think the NBA players might have gotten a small dose of reality at the end of 2011. The economics of pro sports is driven in large part by long term TV contracts. So if/when those TV contracts come up for renewal and the networks don't bid them up to the sky, the player salaries are going to have to come down. Don'tcha think?

 

 
Tue January 24, 2012 10:09 PMReport Abuse
E Brennan
Senior Associate
Member Since: 4/19/1979
Comments: 590
 

The rain doesn't only fall on investment bankers.  A number of other trades (typically low-skilled ones) and selected specialty professions like law are showing consistent reverses, too.  Many a law firm, for example, will confidentially admit that they have gone back to the entry rates of at least five years ago.  With some other nations in even worse shape than us in our continued staggernation status where most employers are frozen in a state of gently optimistic anxiety, the global economy may create more unexpected variable chaos.

For example, I know of one global conglomerate with an EU HQ where the US expatriate efficiency expert arrived to encounter terror among the locals in HQ where they yodeled their fears that their high-paying jobs would be offshored to America where the labor replacement costs were so much lower.  Ain't that a turnaround?!

Meanwhile, sports professionals are paid hundreds of millions to play a game ultimately paid for by people who can't make in a year what they make in an hour.  Explain that one, if you can!

 
Mon January 23, 2012 9:21 PMReport Abuse
Chris Dobyns
Manager, Office of Human Resource Strategies
Member Since: 1/1/1998
Comments: 33
 

Good observations (and apparently another weird instance of 2,000 mile "topical channelling", but with more than a week "tape delay" this time . . .).

Like Ryan, I'm beginning to sneak up on a theory that this recession is going to be notable for being different than past recessions.  Although by all standards, the recession technically ended in 2009, I almost wonder we've continued to linger in a near-recession state for the past two years (my left-brain has been working overtime to coin a clever term for this new type of recession . . .).

I think of the continued emergence of the global marketplace and the perpetual drive to be  the low-cost provider will prove that unfortunately, "markets are efficient".  And will portend a fundamental shift in labor supply-demand dynamics. I will concede that some of the "changes" in the past 3-4 years, have underscored how poorly prepared I am (and maybe other total rewards professional as well) to understand (and explain to my management) all of this interrelated economics science.