Bonuses take knock from annus horribilis

On the investment banking message boards of US website thevault.com, which bills itself as an insider's guide to careers, there is no hotter topic than the Bonus.

One fresh-faced graduate starting at Goldman Sachs worries he's only been promised a $10,000 signing-on bonus at the investment bank.

'Then you're an idiot,' comes the site's stinging reply.

Closer to home, Porsche dealers, Chelsea estate agents and champagne merchants, to name but three, will be wringing their hands over what bonuses in the City of London will be like this year. So far, the signs are not good.

On the face of it, 2001 looks like a diabolical year for those working in the financial sector. The stock market has sunk; mergers and acquisitions have been thin on the ground, and flotations and other public offers have dried up. These activities provide much of the cash mountain that pays out those fat bonuses after Christmas.

The big US investment banks such as Goldman, Merrill Lynch and Morgan Stanley Dean Witter - collectively known as the 'bulge bracket' - traditionally lead in the remuneration stakes.

But as one insider put it: 'The prospects for 2001 are pretty grim. If you are working in an area like mergers and acquisitions or capital markets your bonus could easily be down 60 per cent or more on last year.'

However, this informant concedes that not everyone is likely to share the pain. Investment banks specialising in bond issues should have done very well: 'If you're working in the fixed-income space it has been a very nice year. The likes of Deutsche Bank, Salomon Brothers and Citibank have had a bumper year, because the debt market is on fire.'

In any case, few outside the Square Mile, apart from purveyors of luxury goods, are likely to lose sleep on behalf of those facing a cut in their bonus.

On the contrary, mere mortals might reasonably wonder why there should be bonuses at all in a year when their own investments, pensions and the like have fallen so drastically in value.

City bonuses are, after all, increasingly blamed for a raft of social ills. They are a major cause of the rocketing house price inflation that makes it impossible for such people as nurses and teachers to buy homes in London.

And in April, they were blamed for propping up wage inflation, and stalling an interest rate cut that would have reduced the rest of the population's mortgage repayments

It is the £1 million-plus bonuses paid to a relatively few high-fliers that tend to attract the headlines, but the bonus culture runs much deeper. Alistair Hatchett of Incomes Data Services says that although sectors such as retail banking have an element of performance-related pay, in the City bonuses tend to be both more significant and more widespread. 'No other sector uses money to make money,' he points out. 'If, through your individual efforts, you have made millions for an employer, there's bound to be a feeling that some of that must come back to you.'

Yet Carolynne Ruffle, a consultant at research company the Monks Partnership, who has been involved with its City pay survey for the past six years, says: 'During that time, I've only three or four times seen somebody getting a £1m-plus bonus.' The Monks survey includes around 180 companies comprising international and private banks, stockbrokers and those providing City support services, though not the biggest investment banks.

Ruffle says most can expect to receive bonuses worth 10-30 per cent of their salary, and only 'a very small percentage' can expect a bonus of 100 per cent or more of their salary. 'They tend to be those in the front line; fund managers, investment managers and the like,' says Ruffle.

While there is no single framework for calculating bonuses, she says, there are two basic steps. 'First you have to select the pot of money that will be used to pay bonuses; then you have to decide how you will share it out.' Your bonus could be based on group profits, on local country profits, on the performance of the business unit or the individual.

In some cases, where the market dictates that employers must offer a level of remuneration to retain the best people, it may not be based on profits at all. Your appraisal by human resources or your co-workers may also be taken into account, particularly if the company wants to encourage team-working.

Fund managers, says Ruffle, will usually be compensated not just on the absolute performance of their fund, but on how well it has performed relative to its sector.

'So if the market has fallen as a whole but your fund has done better than its peers, you can still be rewarded.' If anything, she judges, bonuses are becoming even more important rather than less. 'It is becoming more formulaic and less discretionary so that individuals can understand their bonus potential and see how they can get there.'

However, Robert Bowyer, a director of City recruitment consultants Parker Bridge, says that this year many banks and other financial institutions will be pushing more of the bonus money in the direction of their star performers in order to hold on to them.

'Five years ago when there was a downturn, the first inclination was to get rid of people, but now they want to keep their key performers at all costs,' he says. And some disciplines are prospering from the economic situation, leading to an increased need to recruit.

Paul Hunt, a partner in corporate banking recruitment firm Healy Hunt, says: 'We're seeing new assignments in areas such as credit and loan work-out, where you have a distressed loan and you need a specialist to work with the clients to get through their difficulties.'

Salaries at most City firms are in any case so high compared to the rest of the country that even those who do see their bonuses cut this year should be able to shrug it off.

Few companies would be brave enough to cut bonuses altogether. And nobody would be churlish enough to suggest that those bankers who pocketed huge bonuses last year should hand it back just because the market value created by their mega-deals has since been wiped out.

Unlike punters' investments, City workers' bonuses tend to be a one-way bet on the financial markets. It's just that they win less in some years than in others.