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Investment banks globally have increased salaries by 37 per cent over four years to retain staff and bypass regulation, burdening the sector with higher fixed costs at a time when profits are under constant pressure.
The sharp increase in fixed remuneration, which includes salaries, pensions and benefits in kind, has driven up the non-variable proportion of overall pay from 30 per cent in 2007 to 55 per cent last year, according to a study by the Association for Financial Markets in Europe, a lobby organisation.
The findings are set to add further fuel to a debate over bankers’ pay that has already heated up in recent months when investors revolted against the remuneration levels at banks and other companies.
The survey among 13 large and global investment banks showed that total variable remuneration was down 55 per cent between 2007 and 2011, while total pay – fixed plus variable – fell 30 per cent.
Banks’ share prices have fallen faster than total pay, with the FTSE Eurofirst banking index, for example, dropping by more than two-thirds since 2007.
The news about rising salaries is prompting analysts and pay experts to warn that a proposal by the European parliament to curb bonuses by not allowing them to exceed salary levels would exacerbate banks’ rising fixed-cost levels.
“A cap on bonuses could trigger another round of salary increases, which would be a huge mistake as it would add to banks’ fixed costs,” said Kian Abouhossein, an analyst at JPMorgan Cazenove.
In a recent letter to European members of parliament, Afme warned that a bonus cap would risk “reintroducing fragility to the European banking system” as banks with higher fixed costs would “much more likely suffer dangerous losses when revenues drop”.
Tom Gosling, partner at PwC in London, said the proposed legislation would also risk harming London as a financial centre.
“The biggest impact is that banks would be less likely to establish new activity in London – if fixed costs for starting up a team end up being three or four times the fixed costs in New York, the higher commercial risk may be impossible to justify,” he said.
Analysts said the drive to increase salaries in recent years had been mostly driven by medium-sized investment banks that were faced with staff departures and by policy measures such as the one-off bonus tax in the UK.
With further regulatory changes under way that are set to reduce banks’ profitability, Afme said pay would continue to fall in the next few years.
“The historical evidence suggests this regulatory wave will exert continuing pressure on banking remuneration,” the authors of the study wrote.
All investment banks have in recent years added performance-related caveats to their deferred payments, including the right to claw bonuses back, the research has found. In 2007, less than a quarter of the banks used such instruments.