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Extreme Moderation or Restraint? How will Bankers Bonuses look in 2020?

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I have been brought up to think that most City Bankers get huge bonuses and drive Porsches and Aston Martins. I’m also watching the 4th Financial Crisis in my life, all of which seem to revolve around Stock Exchanges, Big Banks and Share Prices plunging globally. And I’m not sure about you, but these types of events seem to always remind me of people like Nic Leeson, Jerome Kerviel , Fab Fabrice Tourre, Kweku Adoboli, Stephen Perkins, and most recently the anonymous trader linked to Mitsubishi Corporation in Singapore in 2019 who the CNN so aptly explain lost far less than some other traders . It is with a certain sense of surrealism that most people digest the sums of money involved around the activities of the aforementioned gentlemen, or lady in the case of our anonymous candidate from Singapore. The brain starts to wonder, how many bonuses did they earn over the years, what kind of salaries were they paid, and how does their bachelor-pad or countryside cottage or both look like? How did such stars from the trading floors lose such vast sums of cash whilst in previous years they had been often rewarded handsomely for their efforts on behalf of their corporations?

I often watch that infamous scene from “Boiler Room” with Ben Affleck where he tells a rapt audience of potential traders what the job looks like and how they will end up covering their parents’ Lexus payments once they join JT Marlin. In much the same way one can imagine some of the trading floors in some of the most influential investment banks in the world. How will things look for traders in 2020 with both an abundance of volatility, but also the social corporate responsibility that corporations have to show during the Virus #lockdown?

Back in January 2018, Laurence Fink, Chairman and CEO of BlackRock brought up the debate about CEO pay in his annual letter to thousands of CEOs around the globe, where he wrote: “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” This kind of statement from such an influential member of the banking community sets the scene for the next few years for the Banking industry as well, and not just the wider global CEO community.

Just as the Virus broke out across Europe, the Chairman of the ECB Andrea Enria, was quoted as saying that Banks must ensure they exercise “extreme moderation” in paying out big bonuses in 2020, even considering taking action against them if they do! Andrea Enria shared his thoughts whilst speaking with the Financial Times. Since then, Enria has also gone on to talk about the role of banks in climate change – and add to that the appointment of Christine Lagarde as the Head of the ECB, his approach so far is matching the priorities set out by the CEO of BlackRock.

It appears then, that the triumvirate of priorities for global banking leaders have been set in stone – diversity, climate change, and make a positive contribution to society. Let’s not stop there though! This week the Bank of England went even further by “expecting companies to provide a letter to HM Treasury committing to showing restraint on the payment of dividends and other capital distributions and on senior pay”. Of course, this only applies to corporations using loans provided by the Government, however the sentiments are clear.

Amid all of this “restraint”, there are a group of employees in the banking sector who, much like Tom Cruise in Top Gun, continue to be the “Mavericks” of the banking industry. These people are the ones who normally have their bonuses scrutinized much as the global CEOs do, and it is these people that we wanted to consider today.

Like Ian covered in the last Article here on #DisruptionBanking, it appears that the big lesson of the Financial Crisis, or the admission to the problem of Systemic Risk by global leaders, has largely been unresolved with recommendations from the Vickers Report in the UK and the Liikanen Report in the Eurozone still left unanswered. All this means for the reader is, that bonuses continue to be high for investment bankers, and the many risks that investment banks take continue to be somewhat mitigated through the strong retail banking arms many of the global banking giants also own.

Many look at the actions of Goldman Sachs during the Financial Crisis, when instead of helping resolve the problems at AIG, the Bank may have turned the wheels on the behemoth of the insurance industry. With hindsight it is easy to see how some corporations these days would possibly act differently in the same circumstances as the subject of moderation is now fully on the agenda.

Many years later, the UK head of Goldman Sachs, tipped to be one of the leaders of Wall Street at the time and probably the most promising UK-born banking leader in the recent past, was dragged through the UK Parliament Select Committee for his company’s involvement with BHS during investigations into Philip Green.

Of course, Michael Sherwood probably didn’t leave his role at Goldman Sachs because of this, however it didn’t help.

And today Michael might have his own Wikipedia page where it says he is only worth £195million and be one of the best remunerated Banking execs in the UK, but he can’t compete with Michael Platt’s £4.69billion when it comes to net worth. With the Sunday Times Rich List 2020 out last weekend, a different Michael grows his wealth almost astronomically year-on-year from trading on the global markets:

Step forward the CFO of JPMorgan, Joanna Pieprzak, who has recently taken responsibility for a rather large headache. There is the small matter of some bonuses she should be paying to her Fixed Income team for impressive results in the First Quarter of 2020. Euromoney have suggested that Joanna will need to motivate her equity derivatives specialists, and their fixed income counterparts, who have helped amass a small fortune in equity revenue for JPMorgan so far this year. Jason Sippel, JPMorgan’s global head of equities, was in a large part responsible for the hard work of his team in delivering this result.

With other banks having varying results in the First Quarter it might be challenging for Joanna and Jason to get their wish to pay out large bonuses, and many people will be watching this space with bonuses set to drop by 30% on Wall Street:

Sentiment about remuneration in both banking and global corporations seems to be shifting, and the Virus appears to be speeding things up with new phrases like ‘extreme moderation’ or ‘restraint’ becoming increasingly popular. Recently top executives at Barclays, including CEO Jes Staley, are donating a third of their fixed salary over the next six months. This all looks promising for the reputation and trust in Banks, however, it may look a little less promising for bonuses of top execs and traders within the Banks themselves.

Finally, we also need to see if the Federal Reserve will get any tougher than ‘expecting banking organizations to continue to manage their capital actions and liquidity risk prudently’.  

Author: Andy Samu