Outperforming UBS bankers appear to have had a pay cut

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Remember the days where you performed better than the rest of the market and increased profits by 44%, and you got a pay rise? UBS's investment bankers may well recall them with fondness. They just did all of that, and their average pay has still been cut by 10%.

UBS reported its third quarter results today. Compared to Deutsche Bank's, the results are excellent. Compared to Barclays', they're good. Compared to most U.S. investment banks they're also good. UBS appears to be taking market share in equities and fixed income sales and trading and in M&A. Witness the chart below.

Nor is UBS's strength just about revenues: the Swiss bank's investment bank also achieved a 44% year-on-year increase in pre-tax operating profits in the third quarter and a return on equity of 19.4% (up from 11.6% one year earlier). Rabbits have indeed been pulled from hats.

And yet, for all the exceptionalism, UBS doesn't seem to be lavishing rewards upon its staff. Compensation spending in the investment bank fell nearly 7% in the third quarter, whilst headcount rose nearly 3%. The upshot was a nearly 10% drop in average pay per head compared to 2017 for Q3. So much for pay for performance.

The truth of the matter won't be known until UBS announces its bonuses in early 2018. For the moment though, average compensation per head at UBS's investment bank for the entire first nine months of 2018 is tracking at an average of CHF469k, down from an average of CHF476k in the same period of last year. Compensation at the Swiss bank looks pretty impressive, but is still falling.

UBS didn't comment on compensation in the materials accompanying its results. The cause could be something other than mounting stinginess - if an increased proportion of previous years' bonuses were paid in cash at the time, there would be less to expense now (although there was little mention of this in the bank's last compensation report). Equally, UBS may have changed its headcount mix in favour of employees in cheap locations or young people (something that is certainly possible given that 179 people were added to the investment bank in the past three months, which is when graduate trainees traditionally arrive).

Even so, it's hard not to conclude that something has changed. Just as J.P. Morgan and Citigroup's results showed banks squeezing costs as revenues rose, so do UBS's. When revenues increase now, it seems that banks are trying to reward shareholders rather than employees. Unsurprisingly, the expectation at most banks seems to be that bonuses will fall this year. If you seriously outperform, the very best you can hope for might be that you are paid flat on 2017.

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