Banking is a nasty, brutish business, in which kindness is a scarce commodity. There is a time, however, which comes but once a year, when a spirit of giving pervades the air. That time is bonus time. As bankers begin to salivate,
Euromoney attempts to spot who the big winners will be.
One thing is certain: the absolute amount of the payouts is enormous. Indeed, the payment of bonuses in the Square Mile is enough to skew the UK's national wage average for March by a third of a percentage point, according to Derek Bird at the UK's Central Statistical Office.
So which bank employees will have the most to celebrate? Sterling and Ecu bond dealers at BZW are set for a windfall. The gilt-edged market-making operations of the bank generated pre-tax profits of over £30 million last year - making it the most profitable of all the City's gilt market-makers. The Bank of England estimates that the total profit of all 20 gilt market-makers was £13 million last year, which suggests that many other firms suffered large losses.
A close eye is being kept on the newly-merged investment banks. For the first time Deutsche Bank and Deutsche Morgan Grenfell (DMG) employees have the same employment contracts. In theory, harmonization means that Deutsche staff in London should do rather well compared to their counterparts based in Germany.
But DMG has strayed into a compliance minefield, with staff formerly employed by Deutsche Bank, ranging from board level directors to associate directors, facing surprise bills for national insurance and income tax payments. Payouts could be slashed by thousands of pounds.
Initially, Deutsche staff members were told that their bonus payments would take the form of preference shares in the parent bank, immediately convertible to cash. This method of payment allowed staff to defer tax liabilities for up to a year and dodge national insurance contributions outright. Early in February, however, Deutsche's compliance department realized that senior directors, due to be paid in advance of the announcement of Deutsche's final results, could end up dealing in bank shares during the closed season. Consequently, DMG will be forced to pay some former Deutsche staff their bonuses in cash. Adding insult to injury, former Morgan Grenfell staff, unaffected by the changes, will receive their bonus payment on March 6, nine days earlier than Deutsche staff.
Although it wasn't a record, 1995 was a bumper year for Wall Street firms. The second half of the year saw huge returns in equities and M&A, while returns from fixed-income trading began to pick up in the final quarter. Smiles were broadest at Goldman Sachs, where 1995 proved a relief after the trauma of 1994. Sentiments were mixed at Morgan Stanley and Salomon Brothers, while staff at Lehman and Merrill Lynch are the most likely to be drowning their sorrows on bonus day.
There will be a large discrepancy between bonus increases for top management and those awarded to more lowly staff. "We've seen increases of between 30% to 40% for the high flyers, but only 5% to 10% for the processors," says Joan Zimmerman, an executive vice-president at recruitment consultancy GZ Stephens.
Fearless traders were kept in check by fearful managers, imposing stricter risk management regimes. Traders are being charged for the inventories of stocks and bonds they keep on the firm's books, with the risks incurred factored into individual profit and loss accounts.
The move towards awarding a bigger share of bonuses in stocks and stock options will continue this year. More and more firms require their senior staff to hold a minimum amount of stock.
"Despite the declining tax advantages of awarding bonuses in the form of stock, it's seen as way of ensuring the loyalty of staff," says Raphael Soifer, banking analyst at Brown Brothers Harriman in New York.
But for many staff, time spent at a bank remains a dash for cash, with no loyalty and no long-term perspective. "Banks have toyed with the notion of adjusting for risk and volatility, but most still opt for the easy option of paying bonuses purely on the basis of return," says Mark Rodrigues, a principal at AMS Management in London.
Rodrigues refers to this as "the Forrest Gump phenomenon". The scriptwriters of Forrest Gump, Eric Roth and Ernest Thompson, agreed a cut of the net revenue generated by the film, while leading man Tom Hanks negotiated a cut of gross revenue. But the studio claimed that the film made no net return, limiting the scriptwriters' payment to a $100,000 advance. Meanwhile, Hanks pocketed tens of millions of dollars for his work on the film.
"Banks should follow the example of the studio and pay a performance bonus out of net returns, including an estimate of risks incurred," concludes Rodrigues.
Ronan Lyons
EVENT RISK
Hanson provokes bondholders
Bond investors in the industrial conglomerate Hanson plc recently learned the meaning of event risk - a half-forgotten term dating from the buyout binge in the late 1980s - when at the end of January the group announced a demerger designed to split it into four parts. Worried about the credit quality of the demerged entities, investors sharply marked down the price of Hanson bonds. As a result, spreads over UK gilts widened by some 30 basis points (bp).
Event risk is a technical term describing a situation in which the credit rating of a corporate bond is affected - generally downwards - by an unforeseen special event, such as a takeover, restructuring or demerger. It first came to prominence nearly a decade ago during the US leveraged buyout boom, when bondholders complained bitterly about deals in which companies were either taken over by highly-leveraged vehicles or were forced to assume leverage themselves as part of restructuring plans in order to shore up their defence.
Hanson bondholders were particularly concerned by the company's announcement that the bond obligations of Hanson plc would remain with the rump Hanson group after the demerger, while leaving open the question of allocating the bank debt. This, it said, would depend on the cashflow characteristics of the new companies. "Bond investors hate uncertainty," says Shira Cornwall, head of bond research at BZW. "This has left a lot of unanswered questions." Investors were also worried about the fundamental creditworthiness of the new Hanson, which will contain construction and aggregates businesses, as well as the group's regional electricity interests. This makes it a far more cyclical business than the existing Hanson group and therefore likely to be accorded a lower credit rating.
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