Investment banks are once again luring top rival talent with generous guaranteed pay packages that may convince a top banker to jump ship, while also inviting scrutiny from regulators across the globe.
Paying a banker multi-millions regardless of performance flies in the face of the global regulatory effort aimed at reining in mega packages and discouraging excessive risk-taking in the post financial crisis world.
In Asia, where M&A, stock and bond activity is heating up, several big-name poaches have occurred lately, with industry sources pointing to guaranteed pay packages said to be worth more than $10 million a year.
"I am against guaranteed bonuses," U.S. 'pay czar' Kenneth Feinberg told Reuters on Wednesday, when asked about the latest wave of these on offer. "We have said guaranteed bonuses are a bad idea so we'll see what those banks do."
Shareholders of certain banks such as HSBC have fought against executive pay, and regulators have taken steps to bring compensation more in line with long-term performance. But so far, guaranteed pay packages have largely stayed out of the radar of the public.
The banking industry says that guarantees are necessary to attract and retain top talent, and may even reduce risk-taking. Proponents say in many cases they are used sparingly and only for top executives.
A flurry of investment-bank hiring has occurred at top levels lately, with a large chunk occurring in Asia, where competition for talent is growing as upstart banks expand in the region.
According to bankers and headhunters involved, the movement of dealmakers here involves favorable guarantees, some worth several million dollars for two years and others hitting eight-digit numbers.
On Sunday, Deutsche Bank poached a top China rainmaker, Henry Cai, from UBS.
Barclays Capital, the investment banking arm of British lender Barclays, recently grabbed two top Asia M&A bankers from Morgan Stanley: Edward King, the former Asia-Pacific M&A head, and Peter Ding, the banker who briefly replaced him.
Bank of America and Citigroup have also hired some big names in the region from rival banks.
In most cases, a responsible banking professional on a guarantee would seek to perform well, create value for the bank, and help the bottom line.
The worry about guarantees is that a banker is paid a lot but not incentivized to outperform. In a worst case scenario, the person could feel that underperformance is not a worry because it won't impact pay, which could result in a riskier decision that costs the bank.
Alan Johnson, a Wall Street compensation consultant, said the industry has an opposite view. "The view of the industry is that if you take a guarantee you are going to take less risk and not work as hard," Johnson said.
Investment banking compensation is formulated the same across the industry. Base pay is set, usually with a limit of $250,000 per year for the top executives. It's the bonus that matters, with top managing directors routinely earning $1 million per year in bonus pay.
At the high end, some top rainmakers are getting up to $15 million for two years in guaranteed pay packages, accounting for a roughly 20-50 percent jump over the previous year.
While guaranteed bonuses are definitely back, industry sources say it has not reached the level seen before the crisis. At the height of the boom, some bankers jumped ship after being offered three-year guaranteed bonuses of between $15-$18 million, industry sources say.
What has stoked the pay and talent battle in part is that more banks are now building out investment banking capabilities. Barclays PLC and Japan's top brokerage, Nomura Holdings, are among those entering the competitive world of investment banking to take on the Wall Street giants.
Headhunters and industry sources say two-year guarantees are rare and only a few top dealmakers get them.
Rose Marie Orens, senior partner at New York-based Compensation Advisory Partners, said guaranteed bonuses are more likely to come into play when someone is being hired late in the year and does not have an opportunity to get a bonus — or if they are leaving money on the table from an old job.
"You are taking into consideration that that person entered in a period of the year when they might have gotten a bonus from someplace else," Orens said. "I think it is about the facts and circumstances."
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