London bankers' bigger bonuses are fraught with complexity
It's bonus time in investment banks. Morgan Stanley already announced this week. Other banks are expected to follow in the coming weeks as fourth quarter results are filed.
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In London, this is a significant bonus year because banks that were previously constrained to pay regulated staff bonuses no larger than 2x salaries by the EU bonus cap can now pay whatever they like. Goldman Sachs, for example, is now able to pay bonuses equivalent to 25x salaries. At the same time, London banks are free to pay higher a higher proportion of bonuses for senior people in cash.
As bonuses rise, however, salaries need to fall. And this is causing tensions. The senior staff who are regulated material risk-takers (MRTs) in banks prefer high salaries to high bonuses because salaries are certain and bonuses are not and flex with performance. Since the EU bonus cap was introduced in 2013, salaries for MRTs have increased dramatically: across Goldman Sachs, Morgan Stanley, Citi, JPMorgan and Bank of America, the average material risk-taker salary was £524k ($704k) in 2024. Before the cap was introduced, senior banking salaries were around half that amount.
Salaries are contractual, and cannot simply be cut, though. When the cap was introduced, many banks made allowances for this by supplementing fixed salaries with allowances which could vary but didn't count as bonuses in the eyes of the EU. Some, however, did not.
The banks without allowances include Citi, which, as we reported last year, is now in the difficult position of having two tiers of staff: one tier of incumbent managing directors (MDs) on very and fixed high historic salaries and a new tier of MDs on salaries that are far lower. When Citi's bonuses are announced this year, the fear is that historic MDs will receive almost nothing and that the 2025 pool will go to last year's many new hires.
Citi isn't alone with this problem, although its lack of flexibility on incumbent salaries makes it more acute. Sources say that new hires at Morgan Stanley in London are also arriving on much lower salaries than before and it's not clear whether existing staff have had allowances removed to reflect this.
A senior trader at one US bank says the ripple effects of the change stand to be significant this year and could rebase total compensation lower for everyone. "Let's say you've hired a new director on a £200k base. But you have an existing director on a £350k base, who's used to receiving a £150k bonus."
The trader predicts that the new hire on £200k will make it harder for the existing trader on £350k to merit a bonus. "You're going to tell him that he's already £150k better off and if his performance is only marginally better, there's no sense in paying him. In the past, he might have received a bonus when he generated $5m in p&l. Now, he might need to generate $8m+."
Perversely, then, pay may fall as a result of the bonus cap being listed. And historic MDs may be disinclined to both work harder or change jobs (at the risk of losing their very high salaries). It will be an interesting year.
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