Investors strive to keep European bank CEO pay below US…

As US bank chief executive pay settles at more than twice the average pay of bank bosses in Europe, shareholders are more determined than ever to prevent American norms from crossing the Atlantic. 

The latest Financial Times bank CEO pay review shows that the men running JPMorgan, Goldman SachsCitigroupWells FargoBank of America and Morgan Stanley were last year paid 2.1 times as much as Europe’s top bank CEOs. 

That is the first time in at least four years that US pay has been more than double European levels, according to the joint research from the FT and pay consultancy Equilar.

“Investors are working very hard to contain what they perceive to be a US pay escalation from infecting other geographies,” says John Roe, head of analytics at Institutional Shareholder Services, which advises more than 1,700 institutional investors on how to vote at shareholder meetings.

“At the behest of” those investors, he adds, ISS now excludes US companies from the “peer analysis” it does to assess whether executives in Europe, Canada and Asia are being paid in line with industry norms. 

“Substantially” higher pay levels have long existed in the US for everyone from bankers to “academics, doctors, lawyers and IT experts”, according to Roman Matousek from Kent Business School. 

However Paul Lee, London-based head of corporate governance at Aberdeen Asset Management, says European attitudes had recently diverged even further from Americans’.

“In the last two years . . . quantum has been on the European agenda in a way that it never used to be,” he says. “You used to discuss only pay for performance, with the absolute number being irrelevant.”

He believes US and European investors now have a fundamentally different outlook — in Europe, where memories of costly bank bailouts are still raw and recent, there is a “social contract” that pay should not go above a certain level. In the US, as Mr Lee diplomatically puts it, “the social contract is different”. 

Andrew Gebelin, of proxy adviser Glass Lewis, which advises investors with $35tn under management, has observed a similar aversion to high pay in Europe. Last year, four US bank CEOs were paid more than $20m between salary, bonuses, pensions and other allowances; in Europe, the highest package was the equivalent of $14m. 

“If any European bank were to pay its CEO $20m-plus you would have seen that shareholders would go against the say on pay resolution in large numbers,” says Mr Gebelin. “It would become immediately relevant in a political context . . . governments naming and shaming individuals to civil society raising awareness of the issue.” 

He believes the fact that European pay is “levelling off or even decreasing in some cases” is “very much a result of engagement with shareholders who are increasingly sceptical about rising level of pay”. At Credit Suisse, where both ISS and Glass Lewis called on shareholders to reject management’s pay proposals, the executive board capitulated and volunteered for a 40 per cent bonus cut. 

“It does seem that the same kind of pressure is simply not there in the US or that it hasn’t paid off yet,” says Mr Gebelin.

Maryland-based Mr Roe argues that US bank investors are simply more willing to pay. ”If a bank is continuing to generate returns and has good ROTCE (return on capital employed) numbers, even $20m compensation figures or $30m . . . just doesn’t affect earnings,” he says.

“There is a vision that some of these are Steve Jobs-style CEOs”, he adds, describing them as “really, really talented financial managers . . . and very hard to replace”. His argument gains credibility from a simple statistic. The US bankers were paid an average of 2.1 times as much as their European rivals. The US banks made an average of almost 7.5 times as much net income as those same European banks last year.

The cases of BNP Paribas and JPMorgan illustrate the point. The French and American banks are similar institutions by many measures. BNP has $2.4tn in assets; JPMorgan has $2.5tn; BNP spans 74 countries, JPMorgan operates in “more than 60”. They both have big retail and investment bank arms, as well as related activities such as treasury services and private banking.

Described like that, it is hard to understand the almost $24m gap in the pay of JPMorgan CEO Jamie Dimon and BNP boss Jean-Laurent Bonnafé. The figures make more sense when you consider that JPMorgan had net income of $22.6bn last year, while BNP made $8.5bn.

Still, Aberdeen’s Mr Lee takes issue with the comparison of Wall Street’s best to the man who created the iPod and Apple Mac. “Have they invented an entire consumer market, and taken that market as their own?” he asks. “No, they have inherited very substantial franchises and run them well, but these large banks now require a huge amount of shareholder capital.”

Mr Lee says the fact that capital demands were now so high made it even less justifiable for big banks to, on average, pay about 40 per cent of their revenues out to staff.

And certainly, not all US investors are comfortable with rising pay rates — the Equilar data shows that US bank investors have, on average, voted against more bank pay proposals this year than in Europe. In the US, pay votes attracted an average support level of 84 per cent last year; in Europe, 89 per cent of investors voted in favour.

Part of the reason for that may stem from the structure of the packages — an April report from research group Autonomous said US banks “lead the way with clear, easy to understand and focused” long-term incentive plans, naming JPMorgan for particular praise. 

As the Eurozone’s economy gathers pace, having just recorded its best industrial output in six months, Mr Lee says there is a “religious debate” about whether investors will succeed in their quest to keep pay so far below the US levels. 

Despite the global nature of the financial services industry, and the international mobility of so many of its workers, Mr Gebelin of Glass Lewis thinks the gap seen in 2016 will persist, or even broaden. 

“In Europe I would definitely expect a continuing trend of overall payments being capped at where they are now,” says Mr Gebelin. “There’s quite a big difference on pay going back a few years, we haven’t seen top US banks poaching European talent,” he adds. “The evidence speaks for itself.”

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