US banks ramp up pay: big five’s comp hits US$142bn

IFR 2417 - 22 Jan 2022 - 28 Jan 2022
6 min read
Americas, EMEA
Philip Scipio

The largest US banks reveled in a record year for investment banking as M&A and equity underwriting activity surged in 2021, but now comes the bill to keep star performers in a hot jobs market. Bankers are expecting record pay and bonuses for a grueling year and banks have socked away billions more than in previous years to meet those expectations.

The big five US banks put away 15% more last year for compensation costs than in 2020 – a rise of US$18.1bn to US$142bn. JP Morgan, Citigroup, Bank of America and Morgan Stanley all lifted pay by at least 10%, but Goldman Sachs led the way, with the amount it will pay its employees jumping 33%, or US$4.4bn, to US$17.7bn, exceeding its reputation for paying for performance.

“JP Morgan and Goldman have sent a message that they intend to win the war for talent in banking,” said Wells Fargo bank analyst Mike Mayo. “I haven’t seen a battle this intense in the three decades I’ve been covering banking.”

Goldman's shares fell 7% on the day of its results due to concern about rising costs, in particular the wage bill.

"On compensation, our philosophy remains to pay for performance, and we are committed to rewarding top talent in a competitive labour environment," Goldman CEO David Solomon told analysts on a conference call. He said he had a personal priority to invest in the bank's people.

“In 2021, we demonstrated this commitment not only through our pay-for-performance approach, but also by supporting our people in a variety of other ways, including new benefits and investments in health and safety.”

Goldman also added a net 3,400 staff last year, an 8% increase. Its compensation bill equated to average annual pay of US$404,000 for each of its 43,900 employees, up 23% from the average in 2020.

While compensation at JP Morgan rose more modestly, it was still up 10% to US$38bn last year, and pay expense inside its corporate and investment bank rose 13% from 2020 to US$13.1bn, including a 20% jump in the fourth quarter.

In Morgan Stanley’s securities group compensation rose 10% to US$9.1bn. Compensation across the bank rose 18% to US$24.6bn.

Pay at Goldman and in JP Morgan and Morgan Stanley's investment banks last year was up 20% from the year before on average. Citigroup and BofA do not break out pay by division.

Margin squeeze

The results confirmed the war for talent that has been raging on Wall Street, and the big banks have been using considerable resources to win and retain bankers.

JP Morgan was among the first to boost starting salaries for junior bankers above US$100,000, which was quickly matched and exceeded by rivals. Last week JP Morgan lifted that salary to US$110,000, with pay rising by US$15,000 in the second year and another US$10,000 – to US$135,000 – in the third year. The increase brings JP Morgan in line with other banks that reached those levels last year and could kick off another round of bidding.

“As we've always said, we're going to be very, very competitive on pay,” JP Morgan CEO Jamie Dimon told analysts on the fourth-quarter earnings call. Dimon said the bank had set aside US$1bn in merit increases for top bankers, traders and managers who did an extraordinary job in the last couple of years.

“We will be competitive on pay. And if that squeezes margin a little bit for shareholders, so be it,” Dimon said.

Mayo cut his estimates for bank earnings in December, expecting expenses to continue to rise this year.

Across the five banks, revenue from investment banking rose 40% last year to US$54bn. Revenue from trading dipped from the record levels of 2020, but was still nearly US$102bn and one of the best years ever.

Bankers across the spectrum are expecting a spectacular pay day when bonuses are handed out, and none more so than M&A bankers, said one recruiter.

“It’s not exactly ‘eat what you kill’, but it's close,” he said. And banks like JP Morgan, BofA and Citigroup, which have in the past put shareholders above bankers as well as their broader employee bases, have been drawn in too.

BofA CEO Brian Moynihan won praise for keeping costs down, but that was not at the expense of banker pay. Instead BofA has reduced its overall ranks, cut branches and used more automation for retail banking, while still growing the business.

“We’d rather pay people more and grow the business,” Moynihan said.

M&A bankers are expecting bonuses in 2021 on average 25% larger than for 2020, according to pay consultancy Johnson Associates.

Bankers have never been in a better position for bonuses, one manager said. If a banker is disappointed with pay, it’s never been easier to find another job, probably with better pay.

“If you’re not getting paid up after two amazing years you might think it’s game over,” another banker said. “You can get a huge amount of dissatisfaction, but you don’t get an immediate exodus. But you can get some disengagement and people looking.”

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