The Sisyphus bonus


Jon Macaskill
Published on:

Life as an investment banker has always had its drawbacks. Colleagues try to steal your business, senior managers expect obeisance, and clients put your ideas out to tender with competitors.

However, at least the not-so-chivalric code of the banker involved an elaborate ritual that culminated in a tangible reward in the shape of the annual bonus.

After a final late-year frenzy of self-promotion and veiled threats of departure to a rival firm, the banker would collect a bonus that was either in cash or a combination of cash and shares that had a reasonable prospect of rising in value. The annual bonus was at least a done deal, whichever way its components were structured.

However, recent trends in compensation have undermined these verities and made the life of the modern banker even more dispiriting.

Deutsche Bank’s introduction of a system to enable it to claw back bonuses paid to its bankers by their former employers, then bought out at their hiring, was the latest move to chip away at the foundations of the investment banking contract.

Deutsche Bank’s newfound zeal for tackling fundamental compensation issues has surprised former employees and rival dealers. The bank was never shy about paying up for staff from competitors in the go-go years, and it did not appear to have made root-and-branch changes to its hiring policies until recently.

Some sales and trading staff in areas that were de-emphasized after the 2008 crisis, such as structured credit, got the tough-love treatment at bonus time. However, Deutsche Bank joined peers, such as Barclays and Morgan Stanley, in going the extra mile for targeted employees at rival firms, once the industry appeared to have made a partial recovery in the wake of the fixed-income revenue bonanza of 2009.

Deutsche has been taking flak from analysts recently for elevated fixed expenses in its investment bank and a cost/income ratio that was well above 80% in the second quarter of this year. That might help to explain the clarion call for an end to vague promises by the industry about cultural changes surrounding compensation that was issued by co-CEO Anshu Jain.

The bank is almost certain to follow through on its threat to slash its compensation bill, if only in an attempt to head off further external pressure to raise capital.

This could cause headaches in certain areas, as some staff members are always mobile enough to jump ship when there is a threat to their compensation. This can happen simply if they endure a disappointing year, rather than as a consequence of a conflict with senior management.

Bob Diamond and Jerry del Missier, the recently departed CEO and COO of Barclays, respectively, were not known for stinting on bonuses for their employees, but there was still an exodus of commodities staff from the bank in the past year – before the eruption of the Libor scandal – after compensation levels dipped and rules on the cash component of payouts changed, for example.

Barclays suffered a downturn in commodities trading revenue, which might have been expected to prompt its staff to accept lower compensation. However, there is a brisk market for commodities specialists globally due to the expansion of independent trading houses, so the Barclays staff did not see the need to put up with any tampering with their bonuses. Roger Jones, the bank’s global head of commodities, left to join Geneva-based energy trader Mercuria in May and a slew of his former colleagues have also left the firm.

Commodities dealers have a relative advantage in the number of potential venues where they can ply their trade. Dealers in other asset classes are sometimes able to make the shift to hedge funds, but this is becoming an option only for high-profile traders with a strong track record, or for relatively junior staff with quantitative skills and limited baggage in the form of restricted bank stock.

That leaves most dealers and almost all sales staff stuck with the banking industry for the foreseeable future. These are the employees who will feel the impact of the reforms of compensation practices. They can be forgiven for feeling that scoring the big paydays that were once on offer in the investment banking industry has now become a Sisyphean task.

European politicians are threatening to enforce new bonus rules where they can, and bank shareholders are finally showing some signs of challenging existing compensation practices. Industry-wide adoption of tougher claw-back rules will only compound the feeling that a bonus is not even safe once it has been agreed at year-end.

Retired bank executives, such as Allen Wheat of Credit Suisse and Sandy Weill of Citi, who extracted hundreds of millions of dollars from their employers over their careers, must be chuckling as they view the landscape they left behind.