The end of the bonus bonanza?

This year investment bankers may not be taking home the diamonds and gold bars which, for tax reasons, used to be part of big bonus packages. But when they tot up their bonus earnings for 1997, a good number will find they can easily afford such extravagances. For European and US investment bankers, it's promising to be the best bonus year yet, even with fourth-quarter global market setbacks, not least because the first three quarters were so very good to most.

"All indications say 1997 should be a peak year," says Michael Mahoney, a 25-year-old Wall Street veteran who runs a New York firm of bond-trader headhunters. "The securities business made more money than ever. That means the top of the market will be paid 25% to 50% more than last year." Mahoney figures there are 400 to 500 investment bankers spread throughout global high-yield securities sectors who will be taking home a minimum of $1 million each in bonus. Many of them command base salaries of $200,000 to $250,000.

Running to eight figures

In such high-yielding domains as emerging markets, some young traders with just one to two years' experience working, say, in Russian securities will net $100,000 and more. For more seasoned traders, some bonuses will run to eight figures. One of those lucky few rumoured to be a potential eight-figure earner is Andrew Ipkendanv, who runs Credit Suisse First Boston's emerging markets desk in London. Word has it that Ipkendanv, who could not be reached for comment, will have taken home some $20 million in his year-end pay packet.

There will also be generous pay-outs for a good number of top corporate financiers, after a dynamic year for mergers and acquisitions. Many corporate-finance specialists can expect to see 40% pay increases, according to a survey by Russell Reynolds, a London headhunting firm. The firm reckons that a managing director at an investment house who earned £800,000 ($1.4 million) last year will take home at least £200,000 more this year.

For many, 1997 may well be remembered like a fine vintage wine, seasoned by seven bull-run years, but perhaps uncorked too soon with the advent of the new mood of uncertainty in the markets. For some, though, the time from October when global stock markets took a nasty spill may if anything have enhanced their bonus spoils.

"I think it's going to be a very good year. From a risk-management perspective, people are going to be compensated very well - in some cases at two and three times multiples of salaries," says Tony Marshall, a former trader and now co-head of a London recruiting firm that caters to global investment banks. "In this day and age," he says, "most would have been insured through the derivatives market, though some would have got it wrong. When you start getting 100-point moves in one day, the ones with the cash are going to make the money."

Paul Roy, London head of European and Asian equities at Merrill Lynch, says the mood on his trading floor was upbeat when the markets began to crash. "People were looking to do some business. One caters to a two-way business. When you see sharp moves in markets like this it encourages business."

But while many fat bonus-stuffed cheques will arrive this month and in March, there are likely to be fewer at investment banks across the board the same time time next year. There's a gnawing worry that the fourth quarter of 1997 could signal tough times ahead, with the glittering performance many enjoyed in the first three quarters fading into memory.

Blows to confidence

Investment banks earn their bread and butter from advising on M&A in domestic and emerging markets, as well as ushering new issues to market. But since October 27, when the Dow Jones Industrial Average plunged 7.2%, its biggest one-day fall since October 26 1987, there's been a knock-on effect that has shaken confidence just about everywhere and is bound to reduce the number of deals being done. A couple of large emerging-market privatizations have been called off in India and Croatia, while at least 20 international share issues were pulled within the first two weeks of October 26.

"It is highly probable that 1997 will have been a peak year for investment earnings," says Martin Green, analyst with Merrill Lynch in London. Green, who says his team is having a close second look at market implications for next year's investment-bank earnings, says the market volatility signals underlying worries. "Confidence in markets is needed for new issues and volatility is an expression of lack of confidence," Green points out.

In the meantime, there's already evidence of a new mood of austerity. There's talk that Deutsche Morgan Grenfell, one of the single biggest spenders on staff for the past couple of years, will be counting its pennies more carefully when it calculates this year's overall bonus pool. And then there are the regulators, who have not forgotten the Nick Leeson and Peter Young scandals, or the derivatives lossethat ultimately undermined NatWest Markets, and which many believed were made possible because of the way staff are remunerated.

In March last year, the Bank of England warned: "We want [banks] to look at the way their payment-incentive systems, which are very powerful drivers of behaviour, interact with their risk controls."

In January, the Futures & Options Association will be making bonuses the subject of its annual City Debate conference. Anthony Belchambers, chief executive of the association, says: "There are concerns that bonuses may increase the appetite for risk. Personal aspirations can sometimes impede loyalties." Belchambers wants a serious debate about how investment banks think they can better impose risk limits on individuals. "The psychology of the trader who performs very well and earns big bonuses sometimes engenders a macho attitude, a bit like what happened at Barings," he says.

Belchambers is clear about wanting investment banks, and not the regulators, to take action. "Personally, I don't think the regulatory way is the way ahead," he says. "The whole concept of regulation is moving to risk-based supervision. Firms are being given more say in the ways of curbing risk. Regulators should ideally look at what the firms have done."