Bonus hype or bonus let-down?

Surprise, surprise - this year's investment banking bonuses are turning out somewhat lower than expected.

Goldman Sachs, Morgan Stanley, Bear Stearns and Lehman Brothers have already announced bonuses for 2005. Rumour has it they've been good but not that good.

"Employees who saw high Q3 revenues coming out of banks were expecting a lot more than they got," says David Korn, managing partner for Europe at the Options Group. "There's general disappointment this year - people were expecting a 25% increase, but the average has been more like 15%."

Lee Thacker, a consultant at recruiter Highland Partners, says even 15% is overstating the case. He says, "The Goldman Sachs bonus round was good, with people in fixed income and commodities we believe paid somewhere between 5% and 10% up with key performers seeing slightly higher increases. At Morgan Stanley and Lehman Brothers, bonuses were generally flat to marginally up, with people in low margin products even seeing a marginal decline on last year."

Recruiters concur that Lehman's equities staff were among the most disappointed with the size of payouts. "There were a number of unhappy people at Lehman," says one. "Their equities division has not done well."

Revelations that bonuses are not quite as massive as anticipated coincide with a new survey by recruitment firm Morgan McKinley, suggesting unrealistic levels of optimism persist. The survey, which covered 145 people during November and December, found 44% expected their bonus to rise more than 41% and 21% expected it to double. Less than 20% were expecting no change.

Recruiters say this year's bonuses are better focused on good performers than in the past. "High performers have been paid well," says one. "Low and mediocre performers are being disappointed to find they are not quite as highly thought of as they hoped."

Stock is expected to account for a steady proportion of bonuses this year, with people earning more than 1 million expected to receive between 18% and 20% in restricted stock according to recruiters. At banks such as ABN Amro and Deutsche Bank, which traditionally pay a high proportion of stock, this could be considerably higher, while others such as Royal Bank of Scotland will continue to pay all cash.

Lehman Brothers is reputed to have extended its stock vesting time from three years to four or five years for this bonus round. Lehman declined to comment on if their stock now vests over a longer period.