JPMorgan Chase & Co plans to keep overall compensation per employee roughly flat this year from last year, lagging gains at rivals, as the bank's massive legal settlements weigh on its results, two sources familiar with the matter said.
Bonuses were largely set early this week, though payouts could change in unusual situations or if there is an unexpected change in the company's results during the last six weeks of the year, said the sources, who spoke on the condition of anonymity. It is not yet clear what Chief Executive Jamie Dimon's bonus for 2013 will be.
Pay increases have been muted across much of the banking sector in the aftermath of the financial crisis, but JPMorgan's plans are on the low end of what experts forecast for the industry this year.
Earlier this month, compensation consultant Johnson Associates estimated that commercial and retail bankers overall will get bonuses that are unchanged to 5 per cent higher this year. It estimated bonuses across all of Wall Street, including large asset management firms, will be up 5 to 10 per cent. Recruiting firm Options Group estimated that average pay will rise 4 per cent.
But JPMorgan has higher legal expenses than rivals. On Tuesday, the bank agreed to pay $13 billion to the US government to settle charges it misrepresented the quality of mortgages it sold to investors before the housing crisis. After taxes, that settlement is equal to nearly half of what the bank can earn in a year.
Without legal settlements, JPMorgan's profit would have been about 27 per cent higher in the first three quarters than the same period last year, an increase that would have made it easier for the company to boost pay per employee this year.
The bank could have taken more dramatic steps to cut costs after recent settlements, like cutting pay across the board or reducing staff.
But its executives believe the legal costs are a temporary drain on profits, and do not want to force current employees to bear too much of the burden of the settlements.
CEO Dimon said this week that it would not be fair to penalize current employees for actions that occurred years ago, largely at banks that JPMorgan acquired in the heat of the crisis.
"We have never blamed employees broadly for mistakes that were made away from them," Dimon said on Tuesday in response to a question from a stock analyst about compensation expense.
Some up, some down
Even if pay on average will be more or less unchanged, an individual's pay may rise or fall, depending on the performance of the employee's unit, and his or her own work, the sources said.
In mortgage lending, for example, overall pay is expected to be down because of the dramatic decline in loan refinancing volume. Asset management employees will generally see pay go up following gains in that division that have come with the higher stock market. Within JPMorgan's investment bank, where the year has been good for some units and bad for others, pay generally will be up a little, one of the sources said.
About 156,000 of JPMorgan's 255,000 employees work in retail, mortgage and credit card businesses, where pay is generally lower than in its investment bank.
The company's headcount has fallen a little since the end of last year, when it was around 259,000, but most of the job cuts have been in lower-wage jobs rather than the investment bank. The bank does not disclose total compensation expense for the whole of JPMorgan Chase.
The settlement JPMorgan signed this week covers its mortgage lending, sales and securitization practices from more than five years ago. Mortgage deals done by Bear Stearns and Washington Mutual before JPMorgan acquired them accounted for about three-fourths of the liabilities involved in recent mortgage settlements.
Dimon's bonus for 2013 has not been set, but for 2012, the board cut his total pay in half to $11.5 million, citing the $6.2 billion of "London Whale" trading losses that happened under his watch.
Even after the substantial checks JPMorgan has written, its legal and regulatory issues are not over. The bank faces at least nine other government probes, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate. It may still also face criminal charges linked to mortgage matters.
In the third quarter, JPMorgan lost $380 million after it set aside more than $7 billion, after taxes, to cover litigation expenses. It was the bank's first quarterly loss since 2004.
The bank said last month it has some $23 billion set aside to cover remaining litigation expenses. The $13 billion settlement it agreed to this week is covered by that figure.