Broken promises threaten bonuses

One is that fixed-income staff are in for a shock. Despite vigorous expectation management by line managers, headhunters say bonuses in seemingly strong areas such as credit derivatives will disappoint. Fixed-income bonus pools at some top banks are said to be down by as much as 40%.

James Hogarth, fixed-income specialist at search firm Hogarth Davies Lloyd, says: "Credit derivatives is one of the areas where certain people will be expecting bonuses on a par, if not better, than last year. However, internal politics may well play a part in disappointing a number of these individuals."

Sharing bonus pools with less productive sectors will be a factor, while unfulfilled verbal guarantees are expected to add to the disappointment. One headhunter says: "Many houses have retained staff by verbally guaranteeing them an increase on last year's bonus. How many will pay up in the end?"

With profits sharply down at many banks, reneging on what staff believe are cast-iron verbal guarantees may be an option. Naomi Feinstein, a partner at law firm Lovells, says verbal agreements are as binding as written ones, but without proof it is the employee's word against that of the employer.

This means that search firms are hoping for a busy first quarter. Enraged by feeble bonuses, structured credit, securitisation and credit derivatives professionals could flood the market in the new year.

Lee Thacker at search firm Whitney Tyzack says staff are more willing to move than they have been for a decade: "Even individuals who have delivered increased revenues run the risk of being paid less this year. There is a general feeling of vulnerability which means that if guarantees are achievable for 2003, people will be committed to moving."

However, Deborah Dor, managing director and structured product specialist at Mantaray Partners, says guarantees will have to be pitched high to encourage movement in the present uncertain climate. Some second-tier houses have already offered premium rates but had no takers.

Dor adds that in debt capital markets, directors and managing directors may suffer the most this year. "Senior management are afraid of losing high-performing vice-presidents and associates and may therefore accept less themselves in order to retain key staff," she says.

Poor bonuses at the top are provoking rumours of higher base pay, ensuring remuneration remains solid even in difficult times. "Senior investment bankers have come a long way from being able to live on their existing base salaries," says a search executive.

Managing directors in corporate finance at Goldman Sachs receive base salaries of $300,000 (E300,000), says a senior headhunter. Elsewhere base pay is typically capped at $230,000.

Jonathan Baines, chairman of global financial services at headhunter Whitehead Mann, says some senior staff might leave the market altogether: "A number of partners and managing directors may be tempted to leave the industry and seek something more interesting."

Salaries are likely to remain stable at most organisations this year. Surveys by Armstrong International, Sheffield Haworth and Longbridge all put base pay for managing directors in corporate finance in a range between 90,000 (€140,400) and 160,000. Bonus levels are less clear. Armstrong forecasts 600% bonuses for top performers; Longbridge expects 260%.

Still more speculation surrounds the structure of pay packages. Sheffield Haworth's survey suggests only 2% of corporate financiers expect the cash proportion of bonuses to fall.

However, Ellen Yaffe, a fixed-income specialist at the Rose Partnership, a headhunter, believes the proportion of bonuses paid in stock will rise. "A lot of houses are looking to pay between 50% and 60% of the bonus in stock," says Yaffe.

In some cases, a higher level of stock is being accompanied by shorter vesting periods. Lehman Brothers is understood to be paying 60% of managing directors' bonuses in stock, compared with 40% last year. In return, the vesting period is falling from five years to three years.

Staff at all banks will know their bonuses in coming weeks, with banks such as Morgan Stanley, Lehman and Goldman Sachs among the first to disclose them. The strength of headhunters' relationships may be judged on how far the rumours are true.