It's bonus season at most financial institutions--big or small, behemoth or boutique. At some, payouts were made in December. At others, bonuses are paid in January after a strenuous month of evaluations, rankings and appraisals in December.
For everybody involved, it's not always a comfortable time, especially in the current environment. For perhaps a generation, senior finance professionals got used to receiving the bulk of their compensation in one lump-sum payout in January. A year of doing deals, generating revenues, bringing in fees, managing risks, handling portfolios, selling services, introducing new clients, making presentations, and creating new products traditionally led to that big day of a big payout.
Times are different now. The art, science and politics of compensation are as complicated as ever--because (a) in 2011 business revenues at banks, funds, and firms were volatile and unpredictable and (b) with regulation looming, not many are sure how current business models can justify the old large incentive payouts that became a habit in the 1990s and 2000s.
Every firm, it seems, is struggling to figure out how to do it right. How do you pay top performers at all levels--sufficiently enough to keep them from fleeing to another bank or another industry? How do you rationalize the right payouts in a scenario of dwindling profitability and uncertain revenue trends--when trading revenues will disappear or revenues from deals, clients, and products aren't consistent or "sticky"? And what are the right payouts in the face of a public looking for a scapegoat to blame the financial crisis and recession?
Some institutions will find a way to continue to pay top performers at mid-2000 levels, even while they scale back operations, reduce staff, and withdraw from certain businesses. Others will strive for a fair, consistent bonus strategy at all levels of experience and performance. In other words, everybody must bear the pain of a new era or a new business model.
A few (including boutique firm Greenhill) have announced they will target total firmwide compensation at a specific percentage of net revenues--probably 40-50%. Bankers and traders must learn to be satisfied within that model. Not the 50-60% levels of the past. If revenues are down, then bonuses will decline to ensure they meet compensation-percentage targets.
Everybody is watching each other, no doubt. What will UBS do? Bank of America? Or Goldman Sachs, Paribas, Blackstone, or Credit Suisse? Financial institutions have always peeped over their shoulders to determine how "the market" for compensation is faring. (Among bulge brackets, Goldman, it was always thought, set the standard for associates, vice presidents and managing directors.)
What does this mean to recent MBA finance graduates, especially those who are early in their careers, still hoping to remain in finance throughout a career, and perhaps yearning (with illusions?) to remain at the same firm for a long time?
1. Financial institutions, especially those accustomed to paying professionals bonuses that double or triple (or quadruple!) their base salaries, often say incentive plans are objective and metric-based. The process starts out that way, as senior managers review contributions, accomplishments and progress of individuals. Further along, however, the process becomes political, subjective, and biased.
Senior managers are instructed to cut bonus pools all of a sudden--sometimes a day or two before scheduled payouts. Some seniors seek to protect favorites. Others shift some of the compensation pie to talented people who threaten to leave. Many managers sometimes can't agree on what is outstanding performance or what types of contributions or performances should be rewarded.
Younger professionals often don't understand the underlying influences of incentive payouts. They won't know the behind-scenes discussions or the last-moment instructions from sector heads to change the rules. The rules are fluid throughout bonus season.
The junior population often agonizes, but shouldn't try to figure out why the compensation game is changing in the middle of the game. Too much anxiety becomes a distraction from performance--which still counts for much, especially as they build reputations and a "buzz" around them and when promotions are under discussion.
2. Incentive payments come in assorted packages. They may include a package of cash, restricted stock and/or options. MBA associates and junior vice presidents seldom, if ever, have a say in the content of payouts. Most prefer up-front cash. Senior managers, in good times, offer up-front cash to keep talent from deserting. In times of struggle, bank management will have few choices--pay in larger percentages of stock and options, or don't pay any amounts at all.
In times of uncertainty and little leverage, younger professionals should gladly accept grants of stock. Furthermore, in times of uncertainty, there's always that faction that reminds us that having a permanent job and a base salary is the bonus after all.
3. Younger professionals shouldn't jeopardize the possibility of a bonus with tepid, indifferent performance or abhorrent behavior in the few days before scheduled payouts. Sector heads and senior managers sometimes change their minds or look for reasons to take away from Paul to pay Peter. A bad impression in December, because of a rude attitude or sloppy presentation after 11 months of superb performance, has often--more than most know--led to a reduction in pay in January.
4. One more life lesson. Bonus season, as much as any episode in somebody's career finance, is a smack-in-the-face reminder that sometimes life is fair, and sometimes it isn't.