There’s an episode in John Lanchester’s book, Capital, when the investment banker character Roger fears his bonus will be the same as his annual salary, £150,000. “In practical terms, that would be the same as being dragged out of the office and finished off with a bullet in the back of the neck,” the author writes.
Bonus award time in the City is a well worn ritual that evokes so many emotions, including anticipation, fear, uncertainty, and relief at the moment when you get what you think you deserved and feel valued, at least for another few months.
From now on, though, the whole process has become a lot more complicated. Yesterday Goldman Sachs, which traditionally pays its most senior people around five times as much in bonuses as it does in fixed salary, withheld news of 2014 salary updates. The bank, like others, is grappling with new EU rules which threaten to cap bonuses as a percentage of salaries (200 per cent being the ratio allowed, after gaining shareholder approval).
Goldman is likely to raise salaries in Europe on average as a way of paying people roughly the same in total as they are being paid already (subject to performance). Next week it’s the turn of JP Morgan, which paid 128 European-based staff in 2012 bonuses that were 5.4 times their average salary. Bank of America Merrill Lynch follows next week too.
The new world might suit the Rogers of this world who will no longer be ashamed if their bonus comes in at a level similar to their salary. But the beauty of the current structure is that it only pays out if the bank’s profitability and employees’ performance warrants it.
Says Greg Campbell, partner at Mishcon de Reya: “The structure for investment banking compensation is sensible. It’s just that in the past you had mediocre performers getting paid millions and alignment between pay and personal/bank performance wasn’t always present.”
Rather than reform the structure to make sure people are paid fairly we seem to be throwing the baby out of the bath water altogether. Shame.
FAIR PLAY FOR FOOTBALL
FOR those interested in the business side of football, City A.M. is hosting a roundtable discussion about Financial Fair Play on 11 March from 18.30 at BT Sport’s offices near St Paul's.
It promises to be a fascinating evening and there are limited spaces for readers who would like to attend. The discussion will focus on the new rules coming in to the game, how they are being implemented and their consequences.
Entrance will be free but those interested in coming need to first apply to email@example.com.