September 21, 2018 / 5:37 PM / a month ago

Breakingviews - Jefferies faces half-a-million-dollar question

NEW YORK (Reuters Breakingviews) - Jefferies has a half-a-million-dollar question to answer. That’s the average compensation for employees at the Wall Street firm, based on results for the first nine months of its financial year released on Friday. It’s 25 percent more than Goldman Sachs shells out. Jefferies also hands staff more of its revenue yet has paltry returns. After a restructuring of its $7.7 billion listed parent, the gap is more prominent and unsustainable.

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

Around 55 percent of the revenue Jefferies made in the nine months up to the end of August went on salaries, bonuses and benefits like pensions and healthcare. Goldman, by contrast, lay away 39 percent in the first half of this year, with Morgan Stanley little different. The bank run by Richard Handler, though, managed an annualized return on equity of just 6 percent so far this year, excluding the one-off charges from last December’s U.S. tax changes.

That’s way below an investment bank’s approximate cost of capital of 10 percent. Its larger rivals are, thanks to last year’s tax cuts, solidly in double-digit territory. The disparity now stands out far more than it used to: In April parent company Leucadia, also run by Handler, unveiled plans to sell most of its non-banking assets and rebrand itself as Jefferies. That’s all but complete.

Cutting the comp ratio to Goldman’s level would free up some $500 million per year for shareholders. Once taxed, that would roughly double what the investment bank might earn this year, tax issues aside. Employees would lose their bragging rights as the best paid on Wall Street, albeit still making an awesome $357,000. But such a change ought also to bolster the overall company’s share price. For those paid in shares, that should be consolation enough.

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