How Long Can Soaring Banker Pay Keep Rising?

Investment banks have minted record results, but there’s only one conversation in town: Pay is going up, and costs along with it.

JPMorgan bumped up junior-banker compensation for the second time in seven months, and pay at the highest level is also swelling. The bank said the 2021 package for CEO Jamie Dimon jumped 10% to about $34.5 million, months after he received a special award as a retention bid.

And at Goldman Sachs, the firm is planning to give about 30 of its top executives fresh equity awards to sweeten the incentive for senior managers to stay at the firm longer. They could unlock millions if Goldman reaches certain targets, Bloomberg’s Sridhar Natarajan reports.

Wages tend to be sticky, i.e., not easy to reverse. But increases in Wall Street pay had a lot to do with soaring performance, and they come with a big caveat. If markets go south, and banking performance along with it, pay will be lower.

James Gorman, the CEO of Morgan Stanley, explained the difference from other types of inflation pressures that large corporations are feeling: “Take our wealth-management business, which is $24-plus billion in revenue,” Gorman said on a conference call with analysts. “Those advisers are paid on a grid. There is no inflation on it. It’s based upon what they produce.” He said most of the investment bank is similarly paid.

That means this year’s compensation doesn’t necessarily need to be like last year. “We are committed to rewarding top talent in a competitive labor environment,” Denis Coleman, Goldman’s finance chief, said during the bank’s conference call this week. “To the extent that the environment in 2022 shifts, that compensation model is highly variable.”

At other banks, headcount has gone down as managers grapple with inflationary pay. That’s true for Bank of America, which for years went on a campaign to slash expenses prior to the pandemic and was early to raise minimum wages. Most of the biggest banks are simultaneously seeing technology expenses swelling, and marketing costs are staying high as well.

Still, “we would rather pay people more and grow,” Brian Moynihan, Bank of America’s CEO, told Bloomberg’s David Westin this week. What’s more: “You can expect us to grow faster than the economy.”

Gorman’s Future

The CEO of Morgan Stanley says that while he’s not going anywhere for now, he’s probably not going to be leading the bank in five years. Gorman still raised the bar for the rest of his tenure after reporting the best results the bank has ever had.

He told analysts this week that Morgan Stanley would seek to reach more than 20% returns on tangible equity for the bank, a bar that’s higher than the targets set by the firm’s biggest rivals. The bank nearly hit that bar this year.

“If we were really operating with a permanent 20%-plus ROTCE, the stock would be much higher than this now,” Gorman said on a conference call. “In fact, I think it should be higher than this now.” The CEO added: “I don’t think you’re going to find another bank in the world that’s putting out a 20%-plus ROTCE goal.” The figure is higher than the 17% benchmark that JPMorgan expects to post in the mid-term.

Morgan Stanley said it aims to increase client assets to $10 trillion as both its wealth business and investment-management unit expand. Wealth alone increased by about $1 trillion last year, pushing the bank's client assets to $6.5 trillion by the end of 2021.

And with the biggest bank results out of the way, the natural order of Wall Street has come back into place. JPMorgan ended the quarter with the most fixed-income trading revenue, while Morgan Stanley handily beat all of its rivals in equity trading. Goldman Sachs had more advisory fees than any other, while also running with the leanest efficiency ratio -- meaning even as costs rose, they kept a lid on expenses in a banner year.

More on Wall Street

• David Rubenstein, the co-founder and co-chairman of Carlyle, said inequality is likely to worsen as inflation hits lower-income earners disproportionately. He spoke to me for Bloomberg’s Year Ahead conference, where the Bloomberg contributor also explained why “we’re due for a correction.”
• Marty Chavez, also speaking at Bloomberg’s event, discussed how his time at Sixth Street and previous years at Goldman Sachs have shown him the gains that have come from investing in diverse communities, often left behind by Wall Street.
• SoFi got approval from U.S. regulators to become a national bank. After a years-long wait, this gives SoFi the green light to start opening checking accounts. SoFi was one of Bloomberg Businessweek’s top 50 companies to watch this year.
• Leon Black and Josh Harris, longtime business partners who built up Apollo Global Management, are now at odds. Bloomberg’s Heather Perlberg explains the war between the firm’s founder and co-founder, who have exited the private asset giant.

More to come. I’ll be in Miami next week for a few days, moderating a panel at the Global Alts conference (by iConnections). Let me know if you have colleagues there or if you’d want to meet while I’m in town. Blackstone also kicks off earnings results for the large private asset firms. In the meantime, tips and opinions are welcome at [email protected].