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Editor’s take: Divining the future from bonus distribution

Sarah Butcher, editor of eFinancialCareers, on the arcane art of reading bonuses like tea leaves.

As an individual banker, the enormity of your bonus reflects your value to the business. But across the business as a whole, the way bonuses are distributed provides an insight into managers’ optimism about the year ahead.

A simple rule of thumb: if bonuses land predominantly in the laps of top performers and senior staff, the outlook is gloomy. But if they’re dispersed between top performers, mid-ranking staff and the long lunching brigade, it can be taken as an omen that 2007 is expected to be as good as, if not better than, 2006.

Why? The rationale behind the bonus oracle is simple. If banks expect 2007 to be a difficult year, payouts will be focused on key staff whose strong relationships will either generate business in challenging times, or whose efficiency is such that they could function effectively when most team members are watching daytime TV.

By comparison, if 2007 is expected to be good (aka as busy as 2006), banks will need all the manpower they can get. And given that finding manpower in the current market is about as easy as diving for pearls off Portsmouth, existing employees need to be paid reasonably – even if they’re not billing 10m or capable of single-handedly writing a pitchbook in under two hours.

The prognosis won’t be apparent until bonuses have been awarded, and even then may be obscured by reticence when it comes to discussing relative payouts.

In the meantime, the crystal ball is looking decidedly murky. Aiden Kennedy, a partner at the newly opened London office of US search firm Christian & Timbers, errs on the side of optimism. He says there will be less differentiation than in previous years: “Now’s not the time to be alienating second- and even third-tier performers – all hands are needed to execute the current pipeline.”

Meanwhile, a rival search firm is predicting bonuses will be fixed on the all-important few. “If there’s a slowdown towards the end of next year, they [banks] know they need to have the best guys on board,” said a partner there last week.

There is a possibility that 2007 will start well, but end messily. If this is the case managers will need to tie everyone in – for a short time at least. Under this scenario the oracle suggests everyone will receive healthy bonuses, a large proportion of which will be paid in options that will be underwater before the year is out.

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