THE INSIDER: Bonus rounds past and bonus rounds future
It is hard to believe that we are approaching the 3-year anniversary of the start of the financial crisis. I think few will disagree, albeit with varying degrees of sympathy (ranging from none to less than none) that it has been a torrid time for bankers.
For people in the industry, it has been three years of highly uncertain compensation rounds. How uncertain? Well...
2007: Not too bad
In the second half of 2007, the crisis reared it ugly head. In response, business volumes contracted, volatility spiked and all banks felt some pain in terms of a reduction in revenues. A few started piling up the major losses.
In advance of the compensation round, expectations were reasonably robust. However, there were fears that payments would be conservative in light of the turning markets.
In fact, the 2007 compensation round wasn't too bad. It was carried by very strong H1
performances, and institutional peer pressure. Payouts weren't that different from previous years in terms of both level and composition.
2008: A disaster
The whole of 2008 was a complete shocker from an economic perspective with huge losses incurred across the street and very few institutions coming through unscathed. Uncertainty around pay was high: everyone knew it would be bad, no one knew quite how bad.
By the time compensation came into view, politics was a real issue. However, the reality was that most banks simply couldn't afford to pay anything close what they'd been paying previously. Economics, therefore, remained the dominant driver - both of lower payouts and innovative schemes to restructure compensation.
2009: Politics and more politics
2009 was the most interesting compensation round yet. It was the year in which politics took over, and economics took a back seat. Uncertainty was magnified as a result: economics is predictable; politics isn't.
Bankers sought to defend their compensation policies by suggesting the politicians didn't explain the economics. They themselves, however, were clearly guilty of not understanding the politics. Although there was forewarning that the structure of compensation was about to change forever, no one really saw the degree of pressure that was brought to bear on the absolute size of payouts. Few would have predicted the bonus tax imposition.
As it turned out, I don't think too many of us can complain. We weren't that far from 2007 in levels in the end.
2010: An absolute limit on pay?
So what about the forward and the 2010 round? From where I stand, it still looks very uncertain.
Aside from the obvious economic uncertainty, we still have the spectre of continued political backlash.
Who would be so brave as to rule out another bonus tax, if not in the UK then in another major domicile? Imagine the consequences if there were a bonus tax in the US,
Equally, what of the transaction tax? What will be the long term impact of higher salaries - will banks use them as an excuse to reduce overall compensation levels?
Political scrutiny of banking isn't going to go away in 2010. If anything, it may increase. The pressure on banking pay will continue, making this year's bonus round look incredibly uncertain.
