Credit Crunch Won't Halt City Bonus Culture ; ANALYSIS

By Spanier, Gideon | The Evening Standard (London, England), April 24, 2008 | Go to article overview
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Credit Crunch Won't Halt City Bonus Culture ; ANALYSIS

Spanier, Gideon, The Evening Standard (London, England)

IF WE don't pay big bonuses, our good people are going to walk.

That has always been the riposte from investment banks, defending the colossal payouts they give their staff. So Bob Diamond, the American boss of Barclays Capital in London, collects [pounds]21 million; the top man at Goldman Sachs here gets [pounds]12 million.

While the good times rolled, such rewards raised only a few eyebrows. But not any more not after banks have lost billions of dollars in the credit crunch.

Many people are blaming a bonus culture that encouraged bankers to take crazy risks for short-term gain rather than long-term investment. That is exactly what UBS, which has written off [pounds]19 billion, said in a damning internal report published this week. The Swiss giant confessed some staff were being paid for the amount of gross revenue they generated, rather than actual profit. They received big immediate bonuses and not enough longer-term incentives, such as deferred shares.

And some of the methods used to assess the subprime securities they traded were flawed. "No formal account [was] taken of the quality or sustainability of those earnings," said UBS.

Few banks have been willing to make such a public mea culpa. But it is plain that every major financial institution is reviewing the way it rewards staff not least because of the economic downturn.

In a climate of job cuts, everyone expects bonuses to be lower.

A year ago a City banker switching jobs might expect a guaranteed bonus during the first two years; a signing-on bonus; and stock from a new employer in exchange for any share awards they lost by quitting their last job. Now the merry-go-round has stopped and few people are landing such deals, says Helen Haley, who specialises in banking at City recruitment firm Longbridge.

Cynics might add that banks are never shy about looking for an excuse to cut or change the rewards they pay.

So UBS is paying its bankers more stock and less cash. Even for top dealmakers, the cash amount was capped at around $750,000. At Credit Suisse, insiders say they are being offered better pension rights to reward loyalty, in lieu perhaps of cash. And at JPMorgan, which escaped the worst of subprime, some bankers are being made to wait longer for their deferred stock to vest say 18 months, instead of a year, or three years, instead of two.

The idea behind giving deferred stock is that it aligns the interests of the employee with the longerterm interests of the bank and shareholders. Some argue that is exactly the sort of bonus scheme that helps to stop bankers thinking only about short-term gain, but that may be wishful thinking.

Leaving aside the question of whether anyone in the City can forget about making a fast buck, it is not clear owning stock and options makes staff take fewer risks. Look at Bear Stearns, which did more than most banks to reward staff with shares, and still got into trouble.

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Credit Crunch Won't Halt City Bonus Culture ; ANALYSIS


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