Investment bankers in China can say goodbye to big pay packages.
Compensation for managing directors at global financial firms in China, including Morgan Stanley, JPMorgan Chase & Co. and Deutsche Bank AG, has fallen as much as 60 percent since 2010 to the lowest level in a decade, according to five senior bankers with knowledge of employee pay who asked not to be identified because they aren’t authorized to discuss the matter.
China managing directors now earn less than their counterparts in the U.S., and their pay is on par with those in Europe and the U.K., where lower bonus pools last year meant a 15 percent cut in compensation. A decline in fees resulting from a dearth of deals has erased the so-called China premium enjoyed by bankers focusing on the country, the people said.
“China is no longer a sacred cow,” said Christian Brun, a founder of Wellesley Partners Ltd., a Hong Kong-based executive-search firm. “This is the first year in a long time that the bankers there haven’t been singled out for special treatment.”
Managing directors working on China deals, most of them based in Hong Kong and Beijing, earned between $900,000 and $1.3 million in salary, bonus and stock options last year, according to the five bankers. Compensation is now the lowest since 2003, when the SARS epidemic that started in China killed about 800 people worldwide and put Hong Kong on the brink of recession, they said. Pay that year ranged from $500,000 to $800,000, two of the bankers said.
China managing directors’ compensation ranged from $1.25 million to $3 million between 2005 and 2010, Brun said, when the number of overseas initial public offerings of Chinese companies peaked at 106, totaling $17.8 billion, according to data compiled by Bloomberg. While pay dropped after the bankruptcy of Lehman Brothers Holdings Inc. in 2008, it bounced higher by 2010 and didn’t fall as steeply as in the last two years, he said.
Compensation for a managing director in North America from 2010 through last year ranged from $1.2 million to $2.01 million, said Jonathan Astbury, head of emerging markets at Altus Partners Ltd., an executive-search firm based in London. Bankers in Europe and the U.K. earned $850,000 to $1.77 million last year, he said.
Pay in China in 2010 “went beyond the market, and now they’re back to market reality,” said Richard Hoon, chief executive officer of I Search Worldwide, a Singapore-based executive-search firm.
The China premium, which refers to higher compensation awarded to bankers who know the language and business culture of China, increased when soaring IPOs meant banks were competing for employees who could secure deals.
Managing director is the highest rank below top leadership positions at most investment banks. At Goldman Sachs Group Inc., it’s the level under partner. Managing directors play a key role in the IPO process, including advising clients on pricing and lining up buyers for shares.
The compensation figures reflect the average compensation of managing directors and don’t take into account pay received by country heads, which is higher, the bankers said.
Spokesmen for Bank of America Corp., Deutsche Bank, Goldman Sachs, JPMorgan and Morgan Stanley declined to comment.
Fees for advising Chinese IPOs overseas, once the biggest contributor to profits for Wall Street firms in Asia, slumped by 53 percent last year from 2011 to $1.1 billion, according to estimates from New York-based research firm Freeman & Co. The amount reached $3.5 billion in 2010.
“The very big ticket items of the past -- mega public-sector IPOs, vast restructurings -- appear to be behind us,” Ken Courtis, founder of Tokyo-based advisory firm Next Capital Partners Co. and former Asia vice chairman at Goldman Sachs wrote in an e-mail. “In investment banking, salaries and bonuses are related to the volume business, and it’s a revenue game.”
Total investment-banking fees from China, including merger advisory and bond issuance, declined 27 percent last year from 2011 to $3.37 billion, according to Freeman. Fees were almost half the record amount in 2010. China deals accounted for 4 percent of the global fees pool last year, the lowest since 2008, Freeman said.
IPOs of Chinese companies overseas slumped last year to an 11-year low of $6.6 billion, down from $12.3 billion in 2011, according to data compiled by Bloomberg. In 2003, 32 deals totaled $7.2 billion, the data show. Banks managed 101 IPOs worth a record $34 billion in 2007.
“China hasn’t been a standout as in previous years, so consequently the bankers have not been paid,” Brun of Wellesley Partners said.
The world’s second-largest economy last year had the weakest expansion in 13 years, growing 7.8 percent, compared with the average 10.6 percent rate over the previous 10 years. Economists surveyed by Bloomberg News forecast a pickup to 8.1 percent growth this year, based on the median estimate.
Investors in the U.S. also have spurned Chinese companies following misstated corporate earnings and the delisting of some firms from Hong Kong and U.S. exchanges. U.S. regulators are probing at least nine Chinese firms for potential fraud. An index of 317 Chinese and Hong Kong stocks traded in the U.S. has fallen 57.5 percent since the start of 2011.
Bank of America, based in Charlotte, North Carolina, ranked first in arranging China stock sales overseas last year, followed by New York-based Morgan Stanley and Switzerland’s UBS, data compiled by Bloomberg show.
Domestic investment banks such as Beijing-based Citic Securities Co., the top-ranked equity underwriter of yuan-denominated shares last year, have seen their bankers’ pay fall 5 percent to 10 percent a year since 2010, said Erick Zhou, a senior manager of banking and finance in Beijing at Lloyd Morgan Executive, a division of Clarius Group Ltd. Total compensation last year ranged from 2.5 million yuan ($401,600) to 6 million yuan, he said.
“The pay of bankers from foreign firms has been more affected by market changes, and they have direct impact on both local players and foreign houses,” Zhou said.
China investment bankers’ compensation in 2012 fell about 15 percent to 20 percent from 2011, and was lower than 2008 and 2009 when more cash was paid upfront and fewer bonus payments were deferred, the five bankers said. The peak years were 2005 to 2007, they said.
This year, “the downward trend of Chinese banking salaries,” particularly at senior levels, is increasing because of “the paucity of deal flow,” said Astbury of Altus Partners. “No significant upturn can be envisaged until the third quarter of 2013, possibly later.”
Banks will need to diversify in order to rely more on fees from other services, including high-yield bonds and structured deals, the bankers said. Those who have only IPO coverage and execution skills may be forced out in the next two years unless public listings pick up again, said I Search Worldwide’s Hoon.
“Pressure to reduce fees, exacerbated by limited opportunities, are a reality facing China bankers,” Hoon said. “There is a need to diversify competency and augment fee income from sources other than IPOs. Bankers who don’t have such specialty skills and knowledge will be eased out.”
Fees from bond underwriting rose to a three-year high of $919 million last year, while income from syndicated loans jumped to a record $216 million, almost quadruple the $57 million of 2010, the Freeman data show.
“The bankers had been paid according to performance and rather than expectation or perceived market value,” Brun said. “As things stand at present, the economics around the China investment-banking business doesn’t lend itself to paying China bankers a significant premium.”
Premier Wen Jiabao today set a growth target of 7.5 percent for 2013 as the nation seeks to end reliance on foreign investment and exports that in the past three decades produced average annual growth of 10 percent. Chinese business leaders have also called on the government to increase the role of private investment in the economy.
“The best is yet to come for China,” Next Capital’s Courtis said. “Think of the vast and powerful development of the private sector in China. Some of these privately owned firms will become global players, raising equity, debt and doing M&A. They will challenge the status quo.”