Saturday, 5 December 2009

Banker's Bonus -- what to do?

Investment Bankers' bonus is another oh-so-hot topic in the press at the moment. With many friends working in this sector, I understand to some degree the frustration from people working in the industry and also those outside the circle who do not get how these guys make so much money at the same time pay no damages for their mistakes (ok, juniors received less bonus last year, which probably was still equivalent to a person's annual salary in other industries). My ears prick up every time I hear the word bank bonus  --- It's just fascinating, our need of money and having as much of it as possible.

Here is my attempt to paint a picture as why there is so much buzz...

With positive results in the finance sector this year, most investment bankers are optimistic that their bonus culture is back after damp compensation in 2009. The Financial Times Weekend newspaper has predicted that bonus will be around 35% higher than last year. For those of you who have no clue how much that is let me draw you a little chart ..

Average global investment bank pay 2009
% Δ ‘08
Analyst *
80 to 90
40 to 60
120 to 150
110 to 120
120 to 140
230 to 260
150 to 200
350 to 500
500 to 700
200 to 250
500 to 700
700 to 950
300 to 400
$1.2m to $1.6m
$1.5m to $2.0m
*NB : 1st year - Analyst (1-2 years experience); Associate aver. 3 years experience
(source Financial Times Weekend Dec5/Dec6 2009)

Let's not even mention Regional Heads or Global Heads' compensation. Of course headlines from last week included some hints that  "at least 5,000 UK bankers would earn over £1million this year" (that's £1billion for a bunch of people in the UK only).

There has been a lot of criticism and anger from the public as to how much bankers are still getting paid in bonuses despite their recent contribution to the suffering of economies worldwide (blind risk-taking investments in incomprehensible financial products). This resulted in millions of people losing their jobs and homes in the western world,  and considerable effects in other developing economies. So why are these bankers still being paid so well?

When the financial world came tumbling down, government had no choice but to provide bailout money to help these banks get back on their feet. Many of them have actually been able to repay the borrowed amount (this week Bank of America won approval to repay the $45bn in troubled asset relief programme) and make huge profits for themselves. But this is also thanks to the access banks have to that "ultra loose money from central bank" (which channels down much slower to businesses) and much less competition within their industry (due to mergers and/or the disappearance of certain bankrupt entities like LB or Bear Stearns).  It's not that they are total genius --- conditions are (still) in their favour and it is a must that they do well as their failure would bring us all down.

So should they be getting a bonus each as ravishing as before? Should these bonuses be regulated by government? I do think they have been overcompensated, especially during bubbles. And this has result in expectation of ravishing bonuses that all  bankers have gotten used to. But I don't think government regulating bonus is a good idea if that regulation is not equally applied to all banks. Because any unequal intervention will do harm to a competitive industry and the finance industry is super competitive thanks to their pay structure.

This is the reason why this week RBS directors threatened to leave after The UK Treasury prevented them from making the bonus payments in line with market rates. This sounds like a slap in the face for taxpayers as 70% of RBS is owned by UK public. But why wouldn't they if they can go work at a competitor that pays them so much better? Restricting RBS' bonus pool while other banks aren't is going to do more harm than good to everyone.

In response to this outrage anger from the public/press, some banks say they will be paying out a much bigger chunk of bonuses in stock this year. And perhaps much of this stock bonus should also be tied to the bank's long term performance. Banks have also find another way to avoid the bonus argument by raising (as much as doubling) basic salaries to their employees.

Reforming the compensation structure is not going to be easy but it needs to be done and done quick. One FT article suggested that there should be a regime to force shareholders and creditors, and not taxpayers, to bear the losses of the failure. Also if banks can pay lavish bonuses they should be able to afford thicker capital cushions by having more aggressive capital requirements. I totally agree with this. There is nothing wrong with people making big gains/losses due to their investments with THEIR money. It just should not be done at the expenses of others.

With all due respects investment bankers are not all bad. They work very hard even at junior levels and competition to enter the market and to stay in the market is fierce. Their sacrifice is what many of us don't want to lose out on (not all bankers have great families). It takes certain personality to make it in this industry. This is partly why they are paid to well to start with.

We will see what the pool bonus pool payout will be earlier next year...

Sources Financial Times Weekend Paper Dec5/Dec6 2009


  1. I agree they deserve to be compensated for the massive sacrifices they are willing to make (e.g. sleep, family, friends, health, etc.). But some of the bonuses were/are just retarded. There needs to be unified rule applied across all banks to make the bonuses 'more fair'.

  2. Honey. Unified rule aint ever going to apply, look at Copenhagen. Someone will always have to sacrifice and it is usually the poorer.

    In terms of IBs, they will just move elsewhere making the UK less competitive which isn't a good thing since the service industry (esp. finance) is the UK's comparative advantage. I think those suckers should just sacrifice their bonus for at least this year ... One year without bonus isn't the end of the world. I don't know why they don't have any conscience!!!