Politicians have railed for big banks to break up after the financial crisis, even some analysts have said splitting up could benefit shareholders, big banks are unlikely to do so for many reasons.
A major one, according to Keefe Bruyette and Woods? Executive compensation.
“The challenge for shareholders, is that incentives for top management appear to encourage size over performance,” Frederick Cannon and Allyson Boyd of KBW wrote in a note Monday. KBW previously advised Citigroup to break up because the stock has not traded above its book value in five years. “Bank executive compensation is closely and positively related to the size of the institution, but not generally related to profitability.”
That comes after Bank of America CEO Brian Moynihan and Michael Corbat of Citigroup revealed they had earned a raise of 23% to $16 million and 27%, to $3.5 million respectively for 2015, a rough year for the financial sector at large. Shares of BofA shed 6% while Citi dropped 4%. CEO compensation at Wall Street’s biggest banks rose 10%, though the sector shed 5%.
KBW noted that while a larger bank asset pool correlated with higher CEO and executive pay in 2015, no such relationship could be seen with pay and stock performance since 2009.
In short, executives are paid more to manage a larger bank, and their pay is less dependent on performance.
“This is in contrast to shareholder returns that have not been correlated to compensation and have generally been greatest for smaller banks, in large part due to regulation,” KBW analysts wrote, noting that regulations following the financial crisis certainly limited the bank’s activities and reduced shareholder returns, “it has not changed the management incentives to remain large and grow.”
Even now, new rules proposed by U.S. regulators to curb Wall Street pay continue to limit big banks—yet still encourage executives to grow their assets. KBW noted that the most recent rules proposed are designed to fix compensation to long-term performance rather than short-term performance, but still leave the definition of long-term performance up to the bank’s board of directors.