Battle of the bonus

After two tough years, most big Wall Street and City of London firms are expected to post higher profits this year. It is early days but average end-of-year bonuses are predicted to rise by about 20% at the larger firms.

But don't expect a season of unalloyed goodwill. Investment bankers and traders look set to fight over the division of the spoils.

This is because the traders have brought home the lion's share of revenue at most investment banks. Lehman Brothers is a good example. Its traders are expected to generate half its expected $8.4 billion this year, according to Morgan Stanley estimates. Last year they generated less than a third.

This disparity matters because of the way bonuses are set. When the bonus pool is created with the budget at the start of each year, each division effectively divides its revenues between those belonging to the...