Our annual salary benchmark report looks at job functions across the City to identify what is happening with salary bands and bonuses across a range of functions and job levels. It reviews both permanent and contract jobs.
This year’s report paints a rather unwelcome, although not unexpected, picture of the City employment market – that of little or no growth in basic pay.
Is pay really frozen across the City?
Of the 142 investment banking permanent job categories compared between 2011 and 2012 we found that there has been no increase in the average basic pay bandings for 131 job types. For five job functions, advertised salaries have decreased and only six out of the 142 job types reviewed have seen basic pay actually increase.
This suggests that for 92% of jobs within investment banks, the salaries at which jobs are being advertised remain within the same ranges as for 2011, in effect a pay freeze. Whilst our review does not capture every single job type within investment banking it is clear that across the board the brakes have been put on investment banking salaries.
So after the most recent round of very weak bonuses we are now seeing stagnation in salaries. Bad news indeed for employees, but is this sudden chill the new normal or a bump on the road to recovery?
Where we expect recruitment demand to continue?
A surplus of qualified candidates and a dearth in revenues means we don’t expect a dramatic improvement in pay any time soon but there are three broad areas where we expect to see strong recruitment activity over the next year:
- Business process outsourcing and the continued compliance work
- Continued investment by banks in interest rate and FX divisions
- Release of pent up activity within the M&A market as corporates start to make use of their cash piles
Demand for staff involved in regulatory change projects is going to remain high thanks to Basel III, Solvency II and the Foreign Account Tax Compliance Act along with projects relating to OTC clearing.
Programme Managers in change and transformation are currently achieving a healthy £90,000 to £135,000. Areas where regulators want banks to pay more attention such as risk are also doing well with a Quantitative Risk Director getting between £100,000 to £150,000 and a Director of Credit Risk £75,000 to £120,000.
The reengineering of banks in order to reduce their costs base will continue to create demand for staff. Within that we are seeing strengthening demand for banking staff from outsourcers. Consultancies and outsourcers are winning more business from banks looking for cost savings by hiving off services such as trade support, reconciliation and settlements across equities, fixed income and credit derivatives as well as responsibility for the delivery of key change programs.
Waiting for the M&A wave to break
But a jobs market can only be powered for so long by regulatory changes and cost cutting. What we really need to see is a sustained growth in revenues.
The latest batch of results from Morgan Stanley and Bank of America show good improvement boosted by fixed income. Excess liquidity created by the European Central Bank and by the Bank of England through Quantitative Easing is helping to drive yield hungry investors from low yielding Government debt into higher yield debt.
Sentiment towards investment banks also seems to be improving. We wouldn’t be the first to point out that despite all the gloom, big businesses will still need to raise capital, private equity investors will want to IPO, wealth will still be generated and need to be invested and hedge funds will still want to take that money and lever it up.
Whilst rates, FX and debt capital markets are looking healthier bankers with particular sector expertise are encountering strong demand in areas such as energy, natural resources and infrastructure.
However for a wider recovery in pay we would need to see a revival in the broader M&A market which has been surprising in its weakness.
The UK saw 1,015 M&A deals in 2011, totalling £75.1bn, down 8% on 2010 and the lowest value on Mergermarket’s records since 2001. A poor performance but could that change? Non-financial FTSE 350 companies, currently hold £160bn of cash, which means that they could double last year’s M&A activity without breaking a sweat.
M&A activity tends to pick up with improving corporate profitability so if the economy recovers later in the year the M&A market could spark back to life dragging the demand for investment banking jobs with it. The performance of investment bankers pay growth is historically not that divorced from broader economic trends.
London’s “safe-haven” status to help
We also think that London’s unique position will help it weather the Eurozone storm –thereby preserving more investment banking jobs.
Whilst there has been a lot of knocking of London for its uncompetitive tax rates and for the anti-banker sentiment of many if its politicians, the London investment banking jobs market is going to benefit from the UKs growing reputation as a “safe haven” investment location.
For corporate and portfolio investment the UK is seen as safe amongst all the turmoil of the Eurozone. The recent political turbulence in the Netherlands and concerns over what a socialist-led government in France would bring can only play in the City of London’s favour. The safe-haven status of prime London residential property to international investors is just one extreme form of this phenomenon.
Will the small and mid-sized players step into the breach?
The big universal banks have been noticeably quiet within the recruitment market in the last six months. More than at any point in the last five years it has been the smaller and medium sized institutions that have kept the recruitment market ticking along with boutiques like Evercore and Greenhill continuing to hire.
However, we can’t expect niche firms and new start-ups to kick start the jobs market on their own, especially as the last year saw a decline in the number of newly authorised financial services firms in the UK – down from 1,150 new firms in 2010 to 931 in 2011.
Nobody is in denial that investment banks won’t have to shrink some of their riskier activities and continuously trim staff levels, but the very worst of the Eurozone crisis has not come to pass.
The Outlook
Many bankers are currently undergoing the rather uncomfortable experience of moving jobs for little or no salary increase. We expect this restrained pay environment to remain for much of this year as few banks will relax on pay until they have their cost/income ratios under control. The surge in banking revenues needed is still over the horizon although there are increasingly signs to encourage job seekers. Smaller firms will continue to benefit by their ability to quickly adapt to a rapidly changing market however it appears that subdued pay growth will continue in the near term.
For a full copy of this year's salary benchmarking report, please click here.