All of the sudden, Wall Street banks aren’t just talking about layoffs, they’re talking about cutting pay for their employees.
If you don’t know Wall Street, you may not realise why that’s strange. So here it is: The years since the financial crisis and increased regulation have looked pretty standard — the beginning of the year can looks solid for banks and by the end, management is talking about cutting costs. This year is no exception.
That cost cutting has usually come in the form of some smaller bonuses, but mostly it’s about painful industry-wide layoffs. Famed analyst Meredith Whitney made headlines when she predicted 50,000 for this year alone.
The fact that around 50% of revenue goes to compensation, however, has not changed.
See, banks would rather get rid of employees than lower their compensation because they’re afraid of losing talent. Morgan Stanley CEO James Gorman explained that to the FT yesterday:
“What the Street has historically done is when revenues went up, they kept the comp-to-revenue ratio flat,” Gorman told the newspaper. “When revenues went down, they increased the comp-to-revenue ratio because they said, ‘We might lose all our people. We have to increase it.'”
That’s the shift. The question is why. Gorman gave us a hint about that too.
“That’s a classic Wall Street case of ‘Heads I win; tails you lose,” he said. “The current Wall Street management is a little tougher-minded about that and shareholders are certainly tougher minded.”
Yep, shareholders. The past few years have seen an unprecedented amount of shareholder activism. Think: The majority of Citi shareholders voting against CEO Vikram Pandit’s $15 million compensation package.
Now, according to Reuters, big institutional investors are starting to make even more noise, and that’s starting to make an impact.
“Sometimes executives are being rewarded immensely for just sitting in their chairs, just coming into work every day,” said Aeisha Mastagni, an investment officer at California State Teachers’ Retirement System, which manages $154 billion in assets. “There is a need to conform to truly performance-based compensation.”
Right now, the poster child for this is Lazard. The company was forced to decrease compensation after Nelson Peltz’s Trian Fund Management LP bought a 5% stake in the firm and demanded that it do so.
Reuters also points out that since Jeffries got grilled about compensation on an earnings call, its stock has fallen 12%.
All that said, shareholders aren’t going away. So what’s a banker to do?