February is the festive season for London's trading community; another record year for bonuses has the City festooned in bright new ties, sharply cut suits, and swaying to the sound of champagne corks. "You all look pretty well on it", commented Eddie George, governor of the Bank of England, in his opening address at the Euromoney international bond conference. That's hardly surprising when a top earner can have a bonus as high as eight times his salary. But the champagne-induced hangovers of celebrating traders are nothing compared with the headaches high bonuses are causing their managers.
In recent years banks have chosen to gamble on the variable costs of employee earnings rather than pencil in large fixed outgoings. It is now evident that the bonus system has backfired, breeding flighty money-motivated traders with loyalties proportional only to the size of the bonuses on offer. "I would never underestimate the value of an individual to a company," says a top city headhunter, "but even I would say that they are demanding above kilter at the moment. The banks are shocked by the amount of cash being paid out and are looking round for other options. A general trend will be an attempt to make share and partnership schemes fashionable". In 1997 the banks are shopping around for the best golden handcuffs.
A golden gag is already in operation; banks are notoriously sensitive about the bonuses on offer. "No, absolutely no, 100% no," says Dan O'Rourke, executive director of equities trading at Goldman Sachs, giving the standard reply to any enquiry on the actual level of bonuses. Still it's hard to keep the big payouts quiet. This year they came at CS First Boston, JP Morgan, Morgan Stanley, Merrill Lynch and Goldman Sachs, where many traders were reportedly taking home complete packages of £1 million.
News of the $25 million bonus earned by Andy Fisher, a mortgage-backed trader at Salomon Brothers, shows that the big payouts aren't confined to a certain group of banks. His ensuing resignation demonstrates the banks' remuneration conundrum. Says a colleague at Salomon: "For Fisher it was a case of 'I'm rich, I'm going'. Who can blame him? I'm jealous". A trader who leaves because he's earned too much money is a rare specimen; more common are the droves who shift allegiances, dissatisfied with their lot. Marten Van Eden, co-head of sales at HSBC markets, handed in his resignation in February, alluding to the fact that a measly bonus only 40% of his salary may have had something to do with his departure.
At Goldman Sachs loyalty is ensured by the partnership system, the prestige of which rubs the ego as well as the wallet of employees. According to a top recruitment consultant, it's a successful recruitment tool too: "We have no difficulty placing the most choosy individuals with Goldman Sachs, everyone wants to work there". But the partnership approach doesn't always work. To run a successful partnership scheme a balance needs to be achieved between the prestige of partnership, as an exclusive status, and the extension of the scheme to tempt employees who feel that they deserve to be awarded it.
"When I worked at BZW," says a manager at a German bank in London "a top-level woman just walked out after 12 years because they refused to give her a partnership. For her the scheme was too exclusive. But if you try to extend a partnership scheme you begin to create 'junior partners' and 'junior, junior partners' the process could go on ad infinitum". No-one wants to join a club that everyone can enter.
Share schemes are another way to encourage loyalty. The latest trend among banks is to "extend the share idea right down to the level of directors in an attempt to create long-term ties between an employee and a firm" says the head of credit business at a large UK investment bank. In practice it is not always popular with employees.
"First Boston always gave stock plans for their employees, with the merging of the Credit Suisse and First Boston cultures this activity may come as a shock to Credit Suisse employees who are used to straight bonus payments" says a former employee of CS First Boston. The firm has regularly suffered from senior management bust-ups and walkouts over pay, he says.
Salomon Brothers' personal equity plan (ominously known as "The Plan"), started in 1990, but became controversial in 1994 after a bad year in the markets. Whereas previously there had been voluntary share purchasing schemes for employees, after 1990 anyone earning a bonus above a certain amount was forced to invest a proportion of it in Salomon shares.
Disgruntled traders showed their dissatisfaction by departing in droves and a renegotiated package emerged in 1996. "The threshold for automatic investment of a percentage of the bonus was increased and the time of holding shares was reduced to three rather than five years," a spokesman says.
"If I wanted to earn real money as trader I would go to Merrill, Goldman or Morgan Stanley, but this is where my life would be hell," says a manager at a German bank. He has sampled the life and bonuses of the big banks but now works for the size of company "where we do things for the fun of it, here we create loyalty in different ways." At 12.15 he's meeting the chief executive for lunch at the Savoy. Perhaps this is the solution the banks have been searching for: an informal chat over John Dory in red pepper juice and a couple of glasses of Meursault les Charmes 1988.
At least it gets the management close enough to their staff to slip on the golden handcuffs without them noticing. Kaherine Baxendale