Remember guaranteed bonuses? In the years before the 2008 financial crisis, they were common when anyone of any significance changed jobs in the banking industry. Even in 2009, Sanaz Zaimi received an alleged $17m over two years when she left Goldman Sachs for Bank of America Merrill Lynch. In the UK, guarantees were banned by the Financial Conduct Authority (FCA) in 2011. Now, recruiters say they’re back – with a vengeance.
“There has been an unprompted increase in the number of guaranteed bonuses written into contracts in the past few months,” says Kumaran Surenthirathas, MD of Rosehill Search in London. “Guarantees are being applied increasingly to top individuals at associate and VP level who are moving into new trading jobs.”
Surenthirathas specializes in fixed income trading positions. So does Christian Robbins at Tradestone Search. Robbins says 20% to 30% of the roles he’s filling now come with guarantees: “Guarantees still apply to a minority of roles, but they're much more common. - There were almost none a year ago.”
Of course, guaranteed bonuses never entirely went away in London. Although the FCA banned guarantees six years ago, it made allowances for them in "exceptional circumstances." This is one reason why Deutsche Bank paid 15 people in its global markets division guarantees averaging €1.3m each last year (The German bank is also one of the main protagonists in 2017).
The other reason for guarantees’ persistence is that remuneration reports are global. Guaranteed bonuses were never banned by regulators in the U.S. or Asia Pac. Even so, a U.S. fixed income headhunter says guarantees are much more prevalent on Wall Street this year than last, and that they’re often multi-year: “We’re seeing a lot of two year guarantees. People are getting their compensation assured for the 2017 and 2018 bonus cycles.”
These kind of multi-year guarantees were held partially to blame for the 2008 crisis. Banks like Lehman Brothers, which hired heavily in the years preceding its collapse, offered generous two year “packages” to entice new joiners throughout 2006 and 2007. Ex-Lehman Europe COO Benoit Savoret famously negotiated a $16.2m guaranteed bonus three days before the bank went under. In the bad old days, new hires were promised high compensation irrespective of the risks they took or those risks’ outcome. This was one reason multi-year guarantees were subsequently banned in the UK.
Although the allocation of guaranteed bonuses to associates has echoes of 2006, banks aren’t exactly replicating the mistakes of the past. In London and the U.S. today’s guaranteed bonuses are usually contingent upon the achievement of particular goals (“conditional guarantees”). This is partly to satisfy U.K. regulators: a guarantee that's linked to targets isn't exactly a guarantee. However, the bar is often set deliberately low so that the promised payments will almost certainly be forthcoming.
Aside from conditional guarantees, Surenthirathas says banks also have ‘soft guarantees’ and ‘indicative guarantees’ in their arsenal. Soft guarantees are like conditional guarantees, except they tend to be linked to nebulous ‘soft targets’ instead of quantifiable achievements. Indicative guarantees are where banks suggest a range within which a bonus is likely to fall. All are written into contracts.
Will the resurgence of guaranteed bonuses last? – Particularly as the fixed income trading renaissance flounders? In the next two months, headhunters suggest guarantees are likely to fade as banks pull back from hiring during the summer lull. In the fourth quarter, guarantees have always been rare – except for significant, strategic hires.
If you’re offered a guaranteed bonus now, therefore, it may be wise to make the most of it, especially if you’re in the U.S. and it will take you up to 2018. In doing so, you’re not only likely to get the level of your bonus assured, you should also receive a significant uplift on last year. “Good people are now only moving for increases of 20% to 30%,” says one headhunter who operates in London and on Wall Street. “They don’t really want to leave their network at their existing firm and they need a substantial risk premium to compensate them if they do.”