Posts Tagged ‘London’

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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High rolling risk and low rolling reality

March 8, 2010

Two important news stories, both of which were largely ignored:

» Hedge funds do not pose systemic risk, concludes FSA

» FSA plays down prop trading impact

Two well known villains of the finance world – hedge funds and prop traders – seem a lot less, well, villainous after the FSA did some investigation of them.

Hector Sants to step down from top FSA post

February 9, 2010

» Hector Sants to step down from top FSA post

The FSA faced criticism that it failed to prevent the credit crisis by not restricting risk-taking at banks such as Northern Rock, which built up huge liabilities.

Mr Sants led the fightback and oversaw an overhaul of banking regulation, saying banks “should be very frightened” of the regulator.

I think it is only regulators who think that the regulated do not fear them. On the other hand, I fear a toddler wandering around with a automatic machine gun for a teddy bear, it doesn’t mean I am in awe of their judgement.

Regulators are basically a bunch of people trying to control a system they have never experienced and do not understand. Occasionally bankers all get together and complain about:

  1. The regulator never actually doing anything, seriously, if you follow regulation very carefully and studiously (and spend a lot of money on it) then you get really tetchy when other people don’t and seem to get away with it scot-free;
  2. Them never understanding anything;
  3. How much worse than the FSA all the European regulators are;
  4. The lack of firm decisions;
  5. How much data we submit which is blatantly ignored.

Except we don’t like to say anything because you never quite know how the regulator is going to respond. And, really, we’re very British in that we don’t like to say anything (but, tsk, do you see what they’re wearing). Besides, that teddy bear might go off.

That Mr Obama seemed like such a nice man (and not a crack whore in sight)

January 29, 2010

Mr Obama seems not to like the banks. You can hardly blame him. Banks’ reaction to news that they will be prevented from trading speculatively (prop trading), cut down in size, not allowed to be too big to fail, and be forcibly separated from their retail banking arms was strangely muted. Perhaps they are in shock. Perhaps they think it’s not going to happen.

This all goes back to the concept of “casino” banks. Banks lost stackloads of money because they gambled it all away like a crack whore with a misappropriated suitcase of laundered drug money.

In reality, the casino analogy is quite neat (not so sure about the crack whore comparison though), not because investment banks are gamblers, but because they are the casino. Banks put up capital and risk money, but like any casino they should always end up on top (back to the crack whore again?) as long they keep an eye on the numbers, are careful about the risk and don’t get over-excited … which they unambiguously failed to do. In that sense investment banks and retail banks are not that different: don’t be stupid and it’s a guaranteed money-earner, get stupid and, well, credit crunch all around. Much is said of their complexity, but banks are no more complicated than, say, a hospital – an institution most people feel more than qualified to comment on.

The separation of investment bank and retail bank is a red herring. In the UK it was the retail banks (Northern Rock, HBOS, RBS) which lost devastating amounts of money, on retail business! Follow this technical detail carefully: they loaned money to people who could not pay it back. Oops! But, strangely, the massive shift in regulation could actually be good for banks. By forcing a true political conflict and getting into the detail, the banks may force some people to be on their side and, even, win an occasional debate. It could be even better for London; most US banks have a huge London presence, and it should not take much to move there. Alistair Darling will be pleased. There is even speculation that some of the banks will turn themselves into hedge funds and so side-step the regulation.

Is this a good thing? After all, banks can be destructive, but then  so can hedge funds – anyone remember LTCM?* – but then so can building societies, and car companies, and pension funds, and tulip bulb markets, and … and crack whores? Well, they’re strictly a bilateral transaction, when it comes to getting fucked on a big scale, you need larger institutions.

* Long Term Capital Management, a hedge fund that went spectacularly wrong, losing almost $5bn in 1998. There were significant fears its bankruptcy would cause a chain reaction in the markets, and so the Fed organised a bail-out, funded by, errrr, investment banks.

Goldman Sachs teams could quit the city over taxes and regulations

January 4, 2010

» Goldman Sachs teams could quit the city over taxes and regulations

Would anyone miss them?

Alongside its results last year Goldman highlighted that it paid £1.1bn in UK corporation tax, the biggest contribution from the UK financial sector. Its 5,000 London employees had also contributed hundreds of millions of pounds in income tax.

Well, yes, apart from that. The news is less serious than it seems: the organisation appears to be thinking aloud, and rather than making idle threats is wondering if it is viable to move (Switzerland is the most likely candidate) and if so, whether or not to do so. Hmmm, that’s actually a lot less comforting than an idle threat. Still, even Goldman appear unconvinced about the idea of moving, which means London may be safe – or, if that is your view, burdened – for a while yet.

JP Morgan London headquarters plan in doubt

December 30, 2009

» JP Morgan may drop HQ plans

JP Morgan have, it is alleged, threatened not to build their very nice new building because of the bonus tax. Several possibilities:

The facts are intriguingly vague. JP Morgan have not actually threatened not to build their shiny new building, but the possibility has been raised by “a senior J.P. Morgan executive“. The building is supposed to cost £1.5 billion versus a bonus tax which is supposed to raise almost a third of that.

However, there is no detail to say that the alleged executive knows anything about it, was sober at the time of speaking or even exists. On the other hand, perhaps its Jamie Dimon, the head of JPM himself, applying more pressure on the government. Also, it’s really just a new building – valuable for builders, but not really a threat to withdraw jobs, and it’s the jobs issue (or rather, London’s precious status as a financial centre) which the government has heard most about. The following quote (from another JPM executive) is also worthy of note:

There were no threats made on the call and we have made no decisions on people or buildings based on the super-tax announcement.

All we really know is that the head of JPM had a chat with the chancellor and said he was not entirely happy about the bonus tax, which is not really surprising. If he had praised it, that would have been a more solid news story.