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Paying back the bonus

Unfortunately, calls for bonuses to be reformed aren’t going away. Fortunately, banks are nowhere near finding a solution.

Outsiders are being lined up to tackle the issue. Alan Johnson, the doyen of Wall Street compensation consultants, says he’s been engaged by (unnamed) banks to look at methods of clawing back payouts when trades turn bad.

“The theory isn’t hard to understand,” he reflects. “The idea is that a portion of compensation would be withheld, and if results turn down in future its value would be reduced.”

The Financial Stability Forum is the latest to disparage the existing bonus model. In a report this week it said bonuses should be based on performance across the entire credit cycle (five years) instead of the past 12 months.

If reforms come to pass, they probably won’t be universal. Johnson says it’s easier to claw back withheld bonuses from traders and senior staff than from juniors and corporate financers.

He also says clawback systems are better applied to the performance of desks and business areas than to the performance of particular individuals: “You’d have to make a decision that if the desk lost money, all the people working there would lose out. Linking this to individual P&Ls would be tough.”

Advantages for some

For bankers, clawbacks might even have their advantages: “For the sake of transparency we’d have to go back to paying bonuses based on % commissions rather than managerial discretion,” says a comp and benefits professional at one US bank.

At the current rate, it seems unlikely that 2008 bonuses will be affected. “It’s still very early days,” says Mr Comp and Bens. Jon Terry, head of the reward practice at PricewaterhouseCoopers, agrees: “We’re already a third of the way through the annual compensation cycle and no organisation has settled on how to deal with this properly.”

Comments (2)

Comments
  1. “The Financial Stability Forum is the latest to disparage the existing bonus model. In a report this week it said bonus should be based on performance across the entire credit cycle (five years) instead of the past 12 months.”

    This would mean:
    a) higher earnings volatility, as in low cycles bonus payout would be based on mid-cycle fees
    b) that it would be impossible for a bank with an underperforming team to bring talent in as future bonus will be reduced by current underperformance
    not an easy one, I’m afraid

  2. What about people changing employer, would their pay-check depends on a business that they are not aware off and not controlling anymore? Would new comers have to wait for five years before receiving a bonus?

    I doubt that the FSF has thought about the problem for five year before expressing its opinion!

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