Posts Tagged ‘Lehman’

Bonuses

April 9, 2010

People misunderstand bonuses. They resent them, too, but there again I resent Ant and Dec, I don’t think they should be banned (although perhaps taxed out of existence?)

I think the best way to tackle this subject is with some numbers, since facts always seem to be a bit lacking in the bonus debate. My salary is just under £75,000 per year. As long as I stay employed I can count on that, and that is the number I would be appraised on for credit-worthiness and so on. It is, I think, very high and is almost £30,000 higher than the average London salary for someone of my age and qualifications. I am always flabbergasted when I see it written down. I have never really overcome my childhood sense of money, when £1,000 seemed unimaginable. Given that when I grew up my parents were poor, money has become something which is both special and yet strangely unreal. Money, most of all, means freedom from worry.

One of the bizarre ironies of the credit crunch is that my salary was a lot less a year ago. Yup, you got it, banking is one of the few (perhaps only) industry to increase salaries in the face of the global downturn. There are a number of reasons for this.

First, some banks have been trying to take advantage of the situation and have been hiring aggressively. Barclays Capital and Nomura are the most commonly mentioned names here, but there are others. Meanwhile, organisations such as RBS and UBS have been desperately been trying to keep hold of their staff.

This has forced those organisations on the defence to increase salaries in order to keep people, and those who are poaching to offer above-market salaries. This doesn’t just apply to the superstars, but to everyone. Need a good replacement for that person who has just departed from your team? Try RBS. In turn, those organisations that are losing people will probably do a salary review and decide they need to increase salaries across the board. Those that have been poaching people will need to do the same thing – it’s not good to poach someone and then have them paid more than their peers.

Second, banks have pre-empted bonus taxes by increasing base salary. The idea is they will pay less bonus but keep people’s total compensation at the same level. So bonus taxes may well decrease bonuses, but they do cause wage inflation.

Combined, some people have done very nicely from the credit crunch; and in the light of honesty I have to number myself amongst them. Others, though, have lost their jobs (employment within the industry is still much lower) or been largely unaffected, so the love has not been shared as equally as some may indicate.

Finally, people have grown much more wary of stock options (typically forming a large portion of the bonus) since stock options in Bear Stearns and Lehman turned to dust.

On top of that base salary, my employer may choose to pay me a bonus. While no doubt I am extremely loveable, this is not a present. Nor is it a performance bonus in the traditional sense, i.e. something which is correlated to pre-agreed targets. If I do well, my department does well, my division does well and the entire business does well, then the bonus will be at its maximum. However, the employer also has a certain amount of discretion: they may not pay a bonus at all if the organisation needs to conserve cash, or they may prefer one person if their individual performance demands it, or if it is felt they may leave. There is no strict formula. Plus, the firm pays by accumulating a bonus pot over the course of the year (i.e. stashing away money from their revenue), so the pot is shared – one person gets more, then logically another gets less. Typically a zero (a donut) is a polite indication that you are no longer welcome and should consider employment elsewhere, unless the firm is doing badly, in which case everyone gets a zero.

My bonus is in the 20% to 30% of my base salary. For senior people, their bonuses will be many times their base salary.

Base+bonus = total compensation. Banks never speak in terms of the two separately. Nor does the taxman. An increase in base may even mean a decrease in bonus in order to prevent the total compensation increasing too sharply.

Put it this way: bonuses allow my employer to cut my salary. One year I may be paid one amount, the next that could be cut dramatically, the year after it may increase dramatically. The more senior the individual, the greater the proportion of their salary is in the form of a bonus, which in turn means more flexibility an employer has to trim their compensation down to the minimum.

Amongst junior employees (i.e. the vast majority) bonuses are typically viewed with some mistrust. Not that people turn them down, but no mortgage lender or credit rating agency looks at your bonus. Plus, banks will avoid increasing base salary unless they’re forced to and prefer to give salary increases within the bonus – typically so they have the option of taking it away again next year. Anyone who is smart stashes their bonus away until they have saved enough to live without a job for a few months … redundancy is a pretty sure thing in this industry. My own base salary once stayed fixed for three years in a row, although my bonus suggested very real pay rises. The fourth year my employer did badly and I got zero bonus, and the fifth, so after five years of employment I was essentially on a graduate’s salary.

This explains why RBS was so defensive of handing out bonuses to its over-performing investment bank division. To hand out a zero was both an open invitation to leave, but also would have been seen by its employees as a salary cut.

I would never argue that bankers are worth what they are paid (“worth” is such a difficult term to pin down), in the same way I wouldn’t argue about footballers’ salaries. What I would say is that the bonus is part of an unspoken deal: when times are bad we take pay cuts, when times are good then pay increases compensate for the flexibility and the previous down times. It is, in effect, an open agreement to accept unilateral compensation cuts. Perhaps we need a union?

On the other hand, perhaps it just further reflects the risk-and-reward culture of the city?

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MPs urge City boards to close gender gap

April 3, 2010

» MPs urge City boards to close gender gap

A report by the Treasury select committee finds “disappointingly few” women on City of London boards and evidence of a “significant” pay gap that is wider than elsewhere in the business world.

“The pay gap exists at entry level,” said John McFall, chairman of the committee, which will monitor the situation during the next parliament.

It’s a worrying situation. The idea of banks being full of alpha males who are casually bigoted is a widespread one, as is the idea that the hunger to win, the appetite for risk and bigotry are uniquely male traits. Harriet Harman’s comments that Lehman Brothers would not have failed had it not been Lehman Sisters is a classic example of reverse sexism based upon false information – shortly before its failure, Lehman’s CFO was a woman, Erin Callan*.

There certainly are financial firms which are still in the dark ages (as there are for any industry), but most banks are on the extreme end of the PC scale and obsessed with the idea of “talent” – their entire view on how they pay is that they are looking to hire the best of the best. The idea that a male graduate employee and a female graduate employee will be paid different things sounds wrong (not to say illegal), so something is going on within these statistics.

Banks, though, do not lend themselves to flexibility. However much they try, they are a slave to the financial markets which have fixed opening hours of 8am to 4.30pm. If traders need to do additional work they can either hope for a quiet market, or do it from 6am to 5.30pm. Not everyone is a trader, not everyone has the same restrictions (I don’t), but the hours of the market drive many other considerations and the more senior people get, they more restrictive those market hours become.

One should always be wary of an industry trying to defend itself against charges of prejudice by claiming special status. On the other hand, neat but untrue stereotypes are something else to be wary of, particularly when used as a basis for policy.

* To be fair to Erin, she wasn’t in the job very long and probably not long enough to make a difference.

Paulson repeats claims that Britain ‘screwed’ US over Lehman rescue

February 1, 2010

» Paulson repeats claims that Britain ‘screwed’ US over Lehman rescue

In On the Brink, the first book by a key player in America’s $700 billion banks bailout, Mr Paulson concentrates on the crazy months surrounding Lehman’s filing for Chapter 11 bankruptcy protection on September 15, 2008.

Barclays negotiated to buy Lehman during the weekend before the bank’s collapse, but the talks fell apart after both countries put up obstacles to a rescue deal. The British bank eventually bought Lehman out of Chapter 11.

Yes, all those barriers. Surely buying the firm that is about to be the world’s biggest bankruptcy is not really that big a deal? Do we really need to vote on it?

Not being a shareholder, it’s hard to speak on their behalf. One of the few things I own is this laptop – if it had decided to buy Lehman Brothers (and, let’s face it, that would be weird in so many ways) then I might feel some resentment at not being consulted, but then my laptop screws me over in all kinds of ways so it wouldn’t surprise me if it was planning a short squeeze (oo-er) on Goldman as I write. Perhaps I should have a say, But then I am just the owner.

It is odd, a few years ago people thought Paulson was machinating on behalf of Goldman Sachs. Now it seems he was just a nutter.

Goldman says reports of CEO testimony improper

January 17, 2010

» Goldman says reports of CEO testimony improper

There are two ways to interpret Goldman Sachs’ activity here:

  • They ruthlessly and unpleasantly sold products they knew were going south
  • They hedged their position

Personally, I believe the latter. Mostly because, as a broker, Goldman’s main job is to help its clients buy or sell the assets the client wishes to buy and sell. Deciding an investment strategy is the client’s job (or their adviser, or asset manager, or whatever). Judging the quality of the assets is the job of a credit ratings agency. Obtaining the assets is Goldman’s job.

If you go to a fishmonger and want to buy salmon – and the fishmonger tells you he thinks salmon is disgusting and you’d be better off going for cod – then you may be wondering when you invited the fishmonger to lunch or asked him for advice on your menu (you may do many other things, from follow his advice or, if you are a serial killer, batter him to death [batter – food pun, ha ha] with a lump of fish, but you get my point). You want salmon, he sells you salmon. He then buys more salmon from his supplier to restock – and his activities of buying and then selling at the same time are unlikely to lead to him being denounced by, well, everybody.

The fact is, investment banking is not a commune. Some hedge fund wants to go long CDOs or the latest cool stocks? Let them. Just don’t expect the broker to do the same thing. We don’t expect our doctors to get our illness, lawyers to become a party to our contracts, estate agents to move in with us. Brokers are risk averse. They’re not going to pin their entire profits on their clients’ investment strategies or even ask them what they are. Many businesses are the same – they are there to help you buy and sell, they are not there to share your tastes. It is when those riskless businesses screw-up, like Lehman, that things get very fishy indeed.