Taking stock of bonuses

PUBLISHED : Monday, 20 June, 2011, 12:00am
UPDATED : Monday, 20 June, 2011, 12:00am


High-level cash bonuses, who gets them and how much they are worth, has been a sensitive subject since the 2008 global financial crisis.

Reams have been written on the need to review how frontline staff of major financial institutions are paid high levels of variable compensation as a major contributing factor in their overall earning structure.

As early as October 2008, Ramyar Moghadassi wrote an article for the Wall Street Journal entitled 'How to Fix Bank Bonuses', and even before the recent crash, Britain's Financial Services Authority was looking at restructuring the approach to variable remuneration to help curb excessive risk-taking.

So how has the industry been affected and where do high-earning potential jobs lie in the aftermath?

Investments banks are typically where the largest bonuses are paid and it will be frontline staff who reap most of the spoils.

Investment bankers, traders, sales people, marketers - anyone who is bringing in revenue into one of those organisations - will most often be rewarded through a combination of base salary and bonuses of varying scales.

But just what kind of effect the global financial crisis has had on the bonus structure within these institutions in the long term is an enormous question.

The most obvious and widely reported primary effect has been that governments around the world have started to try to regulate and legislate what bonuses are paid, how much they are worth and how they can be paid.

The core of the argument, according to industry professionals and commentators, is that banks will essentially always do what the regulators tell them to do.

Sure, they will lobby against issues that they don't like or they don't feel are appropriate but at the end of the day, in order to function in the jurisdictions in which they operate, they have to abide by the regulations imposed.

This sentiment is echoed by executive recruitment firms looking to hire professionals across these areas.

'Banks to a certain degree are being driven by the regulators, but in some cases they have gone as far as to try and get ahead of the game and lead the way by imposing their own code of conduct around remuneration,' says Harry O'Neill, managing partner at executive recruitment company Heidrick and Struggles, 'and sometimes they may find that the regulators accept what they are doing.'

The changes implemented since the large government bailouts have generally not affected the employment structure of the industry but the way in which people are rewarded is changing. That influences people's approach to business and the jobs that are in highest demand.

The general approach by the major banks has been to increase base salaries over the past two years in an effort to change the mix of fixed and variable compensation. With the increase in base salaries there is less personal dependence on large cash bonuses, particularly at a junior level.

'People who earn multimillions of dollars in particular still have a huge percentage of their compensation coming in the form of variables but now they are probably getting less of it in cash than they used to, and there are certainly more restrictions on what they do receive in this way,' says O'Neill.

'That being said, the rule still applies that if they as individuals or their institutions as a whole fail to perform, then they can have some of this form of payment clawed back from them.'

This change affects people's motivation because that big bonus is no longer received in perpetuity.

But how effective is this method of payment and reward in encouraging staff?

Most industry professionals seem to accept the structure as a given within working practices. The industry is no different than it was 10 years ago in the sense that people who work at the frontline of the financial industry have historically been paid in a mixture of variable compensation, and that seemingly continues to be the model.

'If you turn the banking industry into the civil service, it is going to be bad for everybody and that is essentially what you are talking about if you take away the variable compensation,' says O'Neill. 'It is a dynamic industry and it needs to be a dynamic industry. In any industry where there is entrepreneurialism of any sort you need to compensate people accordingly. If you choose not to compensate people in a manner that is commensurate with their effort, then they'll figure out other things to do with their lives.'

There is an argument that the industry would suffer if large bonuses were not an intrinsic component of pay structure. This argument suggests that high financial bonuses are what makes the financial industry responsive to customer needs. It makes the industry competitive but at the end of the day, enormous cash bonuses are not easy to justify.

Most people who work in these high-risk, high-reward roles are recruited straight from university. It is common practice for firms such as Goldman Sachs, J.P. Morgan, UPS and Morgan Stanley to have a presence in the Ivy league universities like Harvard, Princeton, New York University, Oxford and Cambridge, where they market themselves to graduates. So if you want to work for one of these firms, you better start by choosing the right business school.

In Asia, India and China are currently the two biggest stories, and any connection to these markets is a major stepping stone to getting a job with potential for high variable compensation options. Capital folds coming into the region tend to be geared towards these two markets in particular.

According to Hong Kong recruiters, relationships within China are the most in-demand skill-set sought after in potential frontline employees. Securing a high-earning role in one of the major financial institutions generally comes down to networking potential in China or India.

'In terms of job types or titles, these requirements are often found in analysts and traditional bankers,' says one senior financial recruiter. 'People who study the performance of other companies or track the industry and sectors for investments and are well-connected are undoubtedly the most in demand at the moment.'

Traditional technical skills such as commercial acumen, decision-making ability and being able to deal with high pressure situations are still vital but networking ability is often a deciding factor in gaining a position that is subject to high variable compensation.

'Essentially if you can get a meeting with senior individuals or they will pick up your call, banks will jump at the opportunity to exploit those opportunities in the notoriously closed doors of China,' the recruiter says. 'It is not uncommon to hear about senior party members' children being recruited into financial institutions through their family connections and relationships.'

This becomes all the more important when you realise that last year Hong Kong was named the number one market for IPOs in the world. This has led to an explosion in high earning potential recruitment in the areas surrounding IPOs. Hong Kong has become a venue of choice for many Chinese companies looking to raise capital in the US, but equally as many international companies looking to tap investments in Asia.

With inbound and outbound investment, it is a mutually beneficial two-way system, and there is high earning potential on both sides.

Hong Kong is such an attractive gateway to China because it has an established rule of law. However, the emergence of Shanghai as a rival to Hong Kong as a yuan financial centre is expected in the near future.

As China opens its markets to foreign investors, Shanghai is widely predicted to overtake Hong Kong in about 10 years.

For now, banks which have not taken money from their governments have a freer hand in paying their key staff higher bonuses, but the prevailing mood has been to rein in excess. The concept of raising base salaries and making bonuses more proportional to total compensation are all methods financial institutions have employed in response.

It is now possible for certain Asian-based banks to capitalise on the fact that bigger banks cannot pay the larger bonuses which were common in the good years.

As one junior level trader at a major international bank says: 'There has been a considerable amount of reshuffling and talent poaching recently but because most people have accepted that bonuses are under the microscope, their expectations are lower and they will look for softer methods of compensation.'

This move has seen a resurgence in potential career development opportunities, overseas postings and funding for further education as possible alternatives to large cash bonuses.

There are certainly still a wealth of positions available that offer large bonuses as a major earning factor but less weight is lent to their value and softer benefits now have more appeal.