Yes – it’s that time of the year again! No – not Christmas trees, carols, frenzied shopping sprees, boozy corporate parties and stuffed turkey dinners. For most investment bankers, the season of goodwill takes an altogether literal meaning.
Goodwill – or intangible, excess value – neatly sums up what happens behind the scenes in the last quarter of the calendar year. The long-awaited bonus – and promotion – period is just around the corner, as the globe’s financial luminaries get assessed for how much they have (or are perceived to have) produced in the year. It’s a not entirely fair process and one that disproportionally rewards senior ranks. How discretionary payments are determined is often clear as mud, even though formal procedures are established to lend a veneer of even-handedness. In practice, it’s a top-down approach with a bonus pool determined by the powers that be, and that in turn gets allocated across global and regional departments.
This often involves self-assessment by each recipient across a variety of criteria dreamed up by HR consultants. As one can imagine, this is as far removed from a Mao-style auto-critique as possible – it’s all about communicating how great, indispensable and visible you are. Importantly, it normally also involves a 360-degree review by direct reports, peers and managers, although the assessors will often be identified for this purpose by the recipient, which somewhat negates its effectiveness and can become a mutual back-scratching effort.
The managing directors – and those reporting to them – will then meet and discuss each name in turn, often ranking people within a similar year or class of seniority to identify the out-performers, and promote those with the best potential. The list can be long, so it’s largely down to how well one is seen to have done as an individual, and among his or her peers – all within a matter of a few minutes.
The result determines a financial reward that can often represent several times one’s base salary. At least, it used to. These days, salaries have sharply increased – often doubled – as compared to just a few years ago, while bonuses as a proportion of basic pay have been greatly reduced. More often than not, the discretionary element will also be deferred over several years, paid for a large part in shares or stock options, and maybe even subject to claw-back if the bank fails to perform in ensuing years. In extreme cases, as the E.U. is about to rule, caps may even be imposed.
A number of unlucky recipients will also be “zeroed”, a clear message that they should be better off seeking their fortunes elsewhere, and indeed a tacit encouragement to do so. This will be particularly pronounced in the U.K. this year, as bonuses for 2012 are likely to be more than 86% down compared to a boom year like 2007, according to the Centre for Economics and Business Research. The number of those employed in the financial sector in the U.K. will fall for the first time behind those in New York and Hong Kong by 2015.
Of course, the dwindling number of high flyers enjoying guarantees, often as a result of switching from one firm to another mid-way through the year, needn’t worry, as their discretionary payments will have been contractually agreed in advance. And while multi-year guarantees may for the most part now be a thing of the past, a small pool of powerful rainmakers continue to enjoy dizzyingly high levels of compensation, as if the collapse of Bear Stearns and Lehman Brothers, and the resultant financial crisis, had never happened.
Philippe Espinasse, a former investment banker, is the author of “IPO: A Global Guide” (HKU Press).
[This article was originally published in The South China Morning Post on 19 November 2012 and is reproduced with permission.]