Pressure from regulators to discourage excessive risk taking, coupled with the effect of new regulation on operating costs and therefore profitability, has forced private banks to tackle the thorny issue of executive remuneration.
In mid-April, the European Parliament voted for a basic salary-to-bonus ratio of 1:1 to curb speculative risk-taking (although this could rise to a maximum of 1:2 if approved by at least 66% of shareholders owning half the shares represented or by 75% of votes if there is no quorum). The package of reforms also stipulates that a minimum of 25% of any bonus exceeding 100% of salary must be deferred for at least five years.
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Assuming the new rules are formally approved by the Council of Ministers, they will apply from 1 January 2014. However, in recent months speculation has been rife on the extent to which wages have already fallen at the likes of Barclays, Deutsche Bank, Credit Suisse and UBS.
Perhaps unsurprisingly, these and other private banks contacted by Private Banker International were unwilling to go into detail or comment on reports that 2012 bonuses were 10%, 20% or even 30% lower than for the previous 12 months. Even those banks whose compensation reviews are public knowledge refused to discuss the precise impact on staff. For example, Deutsche Bank would not disclose any details of the recommendations presented by its independent compensation review panel to senior management in March.
UBS has been in the vanguard of the movement to amend banking bonus structures. Changes to its compensation structure
for employees earning more than $250,000 introduced from 2012 include enhanced harmful acts provision and the introduction of more stringent performance conditions for equity ownership plan awards to group managing directors, employees with a performance award of $2m or more and ‘key risk takers’ based on group and divisional performance.
These changes mean that the groups mentioned above could lose all their award, rather than 50% as was the case previously, although a cap on immediate cash paid as part of performance awards of $1m is hardly draconian.
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By GlobalData
Salary drops drive up dissatisfaction
These figures do not relate specifically to the private banking arms of these institutions. But they are being reflected in private bank employee compensation according to Jake Parry, a consultant on the wealth management desk of financial recruitment specialist Selby Jennings.
He says bonus payments in particular have fallen in the private banking sector "which is causing an increase in staff turnover and dissatisfaction within once happy and loyal teams. This is not the case with all private banks, but on the whole we are seeing more caution, which in turn is leading to only the highest performers receiving their incentives and full bonus."
Research conducted among banking professionals in New York, London and Singapore by Selby Jennings during November 2012 found that the outlook on bonus prospects for 2013 was mostly negative. More than half (57%) of respondents said bonus prospects were decreasing and a further 30% did not see their bonus prospects changing over the coming year.
Salary sentiment was most negative in London, where half of those surveyed believed that a salary increase in 2013 was less likely than in the past 12 months and just 15% thought a salary increase was more likely. The percentage expecting a smaller pay packet dropped slightly lower to 43% in Singapore, whereas 18% of New York-based bankers were optimistic about their chances of getting a rise in 2013.
Work-life balance was considered more important than bonus or salary in London, whereas salary was the most important consideration for Singapore-based bankers and those based in New York valued their bonus most highly.
Parry explains that potential private banking candidates are coming from basic salaries of £200,000-£300,000 and are already expecting a dramatic decrease on this at their next employer because of market conditions.
"This has worked favourably for private banks, who are now able to hire top bankers on salaries that such candidates would
not have considered in recent years. In other cases we are seeing lower basic salaries but higher incentives regarding bonuses and
commission," he says.
He suggests that in some cases, target related incentives are not being honoured.
"Targets still exist whereby if an employee meets their end of year target or exceeds it by a certain amount they are promised a pay rise, but this appears to be a hollow promise in some private banks and is leading to some top bankers looking elsewhere. Family offices are gaining the biggest advantage from this as top talent are given more lucrative incentives, including higher percentage payouts on the returns they get from assets they bring in."
While private bankers in Asia are doing better than their European and North American counterparts when it comes to basic salary and bonuses, Parry observes that banks in the Middle East are still offering competitive compensation packages for senior private bankers that have strong relationships to transfer.
Geoff Fawcett, a director at Hays Financial Markets unit, has considerable experience of private banking recruitment in the UK. He refers to a high degree of uncertainty in this market over the last 12 months in particular, which has had a direct impact on the types of positions being offered – and sought.
"The contract segment of the business is far busier than the segment that deals with permanent positions. This suggests that clients
are keen to keep their cost base flexible and that candidates want flexibility and in many cases would rather have the certainty of a daily rate."
More than half saw no bonus
Hays conducts regular banking sector surveys and according to Fawcett, lower bonuses is one of the most striking findings of its latest publication. Just over one-third (35%) of respondents said their bonus fell in 2012 and a further 20% received no bonus
at all. While the rate of decline in bonus payments seems to have slowed – almost half (48%) of those surveyed last year took a lower bonus than in 2011 – there has been a significant increase in the number of staff who received no bonus at all, up from 14%
last year.
Fawcett thinks private banks are doing a better job of managing bonus expectations. "They realise that many departments are already running lean teams and are conscious of not alienating more senior staff. They are also making efforts to include lifestyle choices in the incentives offered to staff, but our survey respondents do not consider these to be significant factors." For those whose bonus decreased last year, 88% have not been compensated in any other way.
He says that overall wage bills have undoubtedly fallen over the last 12 months as the number of people employed in private banking has declined.
"The only area where we have seen salary growth is within the corporate governance space for risk and compliance specialists, where there has been up to 20% pay growth," says Fawcett.
When asked how employees have responded to these changes, his response indicates a divergence between new recruits and relatively experienced staff.
"Private banking is fundamentally an attractive proposition for new entrants. Overall remuneration is still excellent compared to other industries, so it continues to attract high quality candidates at the entry level. New recruits’ levels of expectation have also changed. They realise that bonuses have to be earned and that is a positive trend."
However, those with between five and 10 years’ experience seem to be particularly unhappy with their lot. "Almost three quarters of those who responded the survey refer to dissatisfaction around bonuses – 74% are unhappy with their pay-out, which is higher than 2012. Worryingly, employees who have been with their bank for 6-10 years are the most dissatisfied. Some of these staff are experiencing a decline in their income for the first time."
Hays’ 2011/12 recruitment trends review referred to Asia as one of the few bright spots for private bankers where banks with Asian interests seeming to be coping better with the global macroeconomic climate and showing signs of growth.
Asian banks become increasingly selective
However, Fawcett says conversations with colleagues in Asia indicate that banks in that region are only prepared to offer the most attractive packages to candidates who can bring business with them.
"Private banks in Asia are increasingly looking for people with an existing book of clients who can add value almost immediately – the incubation period for private bankers has shortened noticeably. Clients are being selective and we have seen a major uplift in base salaries to attract the best staff."
This observation tallies with the findings of McKinsey’s 2012 private banking survey. This report found that while private banks’ increased focus on ultra-high net worth households led to an 11% reduction in client-facing staff in North America, increased competition for these customers drove up the price of top talent to the extent that the average compensation costs of frontline roles increased by the same percentage. The net result was virtually no change in total frontline compensation.
In Europe, the survey also found that cost containment had proved challenging despite a fall of 3% in staff costs among those banks that had successfully reduced their overall cost base – about one third of the total surveyed. Across the sector, costs increased by 4% in line with a similar increase in assets under management, but a subsequent decline in the latter was not matched by a fall in costs.
McKinsey’s research refers to increased compensation costs for relationship managers in Asia, even though average assets under management are about 20% below the European average.
While Asia may have, in previous years, been seem as something of an El Dorado, nowadays the costs of running private banking
businesses are putting the brakes on salaries in Asia, as they have already done elsewhere. The movement away from a product
push mentality has also made it harder for bankers to illustrate their value.
