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How bonuses used to work

We’re a little late on this, but last week MarketWatch published an interesting contribution to the bring back partnerships debate.

Back in the partnership days, it points out that pay practices were ‘less extravagant and far less controversial.’

They [advisory houses] earned profits on fees for their work. To pay bonuses, banks would set aside 80% to 90% of the company’s profit each year and partners would take home a pre-determined percentage of the compensation pot. In some cases, because the banks lacked capital war-chests, partners would be paid a 6% to 8% interest on the retained capital instead of a bonus.

By divvying up the profit, partners also shared in the liabilities, such as bad stock bets or deals that wound up in legal courts. There was no public shareholder money at risk.

Nowadays, bonuses are measured as a percentage of revenues and the notion of sharing in liabilities is dead and buried.

Nor is it ever likely come back. For all the talk of malus systems and clawbacks, pay consultant Jon Terry at PriceWaterhouseCoopers says no one has seriously mooted a revival of unlimited liability partnerships.

Yves Smith at naked capitalism says this is a bad thing: “Any model that involves limited liability, other people’s money, and a government backstop (which we now know is guaranteed for big players) is still a troublesome mix.”

Comments (4)

  1. Sod the banks, go to a smaller broker where you can negotiate a deal.
    33% of all commission I make I get as bonus – whereas it is more like 10% elsewhere.
    All my friends from my public school and university are now my buy-side clients so they guarantee me good business, and in return I can wine/dine/holiday/entertain them however they like, which I then expense.

    Life is bliss.

    Exane Paradise Reply
  2. Yes but don’t you live in terror knowing you can be replace by a iPhone app?

  3. Wha a tool you are Exane Paradise..junior brokers should stick to bringing the teas and coffees round, and if you are allowed to take out some junior clients ..be good and dont advertise it too much..some of us are busy

  4. Who said my clients are juniors? I’ve been in the game for a decade.
    Get paid 7 figures to take my mates out to exclusive concerts and sports events. Whilst sales-traders may be being replaced with DMA, salespeople will always be an integral part of the investment process – as has been proven this decade where the buyside could technically live without us quite easily, but choose not to.

    Exane Paradise Reply

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