Taylor Swift may hand out bigger bonuses than many banks this year

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

This is the time of year when the financial press writes their feverish takes on what they call the “bonus season.” 

This year, it will feature brutality:

More brutality: 

. . and . . . disappointment.

These articles tell a bleak narrative of consecutive years of anaemic revenue generation, sluggish deal flow, and low personnel attrition, heralding an impending compensation cycle of Torquemada-like cruelty. 

Even stripping away the hyperbole, these articles chime with what Alphaville has been hearing. Outside the small cohort of restructuring advisers, overall pay will probably be lower for most bankers for the second straight year.

Some are in for a rude awakening, as their bonuses will pale by comparison with those doled out by Taylor Swift to her crew (then again, her roadies have had a much better performance year and don’t have the luxury of hybrid working).

All that said, bonuses don’t carry quite the same make-or-break financial importance that they used to.

Following the financial crisis, banks ratcheted up fixed compensation, paying much higher salaries — and, in Europe, introducing “role-based allowances” for “material risk takers” to get around the bonus cap.

Moreover, a big chunk of big bonuses consists of restricted stock vesting over three to five years — and at least seven years for UK-based “Senior Managers”. As bank share prices have slumped, bounteous share grants awarded for a banner 2021 year now promise a more measly pay-off.

Higher fixed pay also means that a “doughnut” — although never a good signal — may not be quite the dunkin’ it used to be.

In the past, a zero bonus was a near-certain prelude to leaving the firm, voluntarily or not. But that’s not so much the case now. In Europe some managing directors earn over seven figures in salary and allowances, and even in the US or Asia many will pocket mid-to-high six figures in wages. It still hurts to receive no bonus, but, as Detective Frank Drebin says, “not as much as jumping on a bicycle with the seat missing”.

Still, a lower overall compensation pool generally hits senior bankers the hardest. If the pool sees a single-digit percentage decrease, it implies a double-digit compensation decline for the average managing director, because it is difficult to cut junior and mid-level remuneration versus the previous year. The so-called “march of the classes” — the gradual upward pay progression of the lower and middle ranks — can be funded only by taking a meat cleaver to senior banker compensation.

Two years into a deal downturn, this mathematical reality is creating strains in the system.

One complication is that banks hired a lot more junior and mid-level staff in 2020 and 2021 to handle a surge in dealflow and have been reluctant to downsize in case activity picks up again. Some banks even extended permanent job offers to all summer interns during COVID-19 for compassionate reasons. Less lateral hiring from private equity firms and hedge funds has also left banks with more bloated lower ranks. As that large rump progresses, something is going to have to give.

Senior executives like to stress the need to retain “top talent”. However, tepid revenues, high fixed pay and natural escalations in junior and mid-level compensation mean there’s not much money available to retain the most valuable rainmakers and traders.

Banks are going to have to identify which managing directors genuinely have a decisive role in revenue generation, as opposed to the broader franchise. Is that star banker really at risk of being poached by another firm? Or is it true, as Charles de Gaulle allegedly said, that “the graveyards are full of ‘indispensable’ men [and women]”?

These questions arise every year, but now they put a spotlight on a critical issue: reducing bonuses won’t make much difference to the cost base.

The old strategy of using variable compensation to slash costs in a downturn works only at the margins. Even if banks nix allowances in London following the UK’s decision to scrap the bonus cap — which will require jumping through some legal hoops — the impact will be negligible.

All of this means that bonus day is a far more humdrum affair than it used to be.

When I first started in the 1990s, bankers eagerly anticipated bonus announcement day like pagans counting down the days to the annual harvest festival. It held transcendental significance: your “number” not only determined the vast majority of your full-year compensation but also summed up what you were deemed to be worth. As a rookie banker, I witnessed epic displays of jubilation and exultation, as well as tears and tantrums, from ostensibly grown-up bankers.

Those days are (mostly) long gone. A bonus today is in most cases just another spreadsheet entry. Bank bigwigs can shuffle money from one Excel cell to another, but they don’t have much room to manoeuvre in an era of lower-for-longer revenue.

Bankers hoping for a blockbuster bonus will just have to shake it off for another year.