MIDDLE EAST MOLE: Bonus expectations show bankers are still in a fantasy land

Eid is over, we're into October and now's the time when bankers and financial services professionals across the Gulf region make a last-ditch push to bump up what looks like being another diminutive bonus pool for 2010.

Everyone 'knows' they are worth more than they will be paid this year. Expectations seem largely unrealistic, with many junior-mid guys anticipating payouts to be up on last year, regardless of the tough Q2 and Q3 and the lacklustre pipeline going into the end of the year.

Several fellow bank and buy-side bosses have confessed they are unlikely to approve bonus increases this year. Personally, my fellow board members and I, even during a strong year so far (2 PE exits and doubling of advisory income) will not increase compensation, with prudency the order of the day as we enter the still murky waters of 2011.

Fortunately for most staff, many base salaries are up considerably, following a similar move from international competitors to combat regulatory changes in Western markets. Therefore, variable comp will form a smaller part of the total and there (should be) less room for disappointment, particularly for directors and below.

Still, there remains the problem of convincing key staff to stick around after distinctly lighter bonus payouts. Firms are having to be more creative.

Unusual methods of locking in star performers

Many privately owned entities have introduced carried interest (or a form thereof), locking in star performers while reducing the immediate cash outlay of a bonus. Larger international institutions already use deferred stock in their comp.

But equity sharing is something most of the region's short-sighted CEOs refuse to do, to the detriment of their institutions and ultimately themselves. This is one of the most powerful motivators for growth, and by refusing to do this, they severely limit the talent they're able to attract.

This is still relatively conventional, but more creative ways of keeping people happy are being employed. The CEO of one boutique firm as agreed to a 20% salary increase and a sports car (second hand from a board member) in lieu of a decent bonus. Another is considering handing out expensive watches, thus allowing shareholders to shift old stock from their other businesses. This is unlikely to please - in this environment few would consider pricey horology as the preferred choice for their reduced compensation.

There was even a rumour that one firm was offering a year's supply of dates and camel milk in lieu of bonus, but I think that's just hearsay.

The delusional 'big swingers'

Still, there are many ego-warriors in this region, even in the current climate.

The DIFC is still a relatively small place, so it probably wasn't a wise idea for one banker in his late-20s to be loudly discussing his bonus expectations over lunch with a colleague. He decisively threatened to walk out from his institution (to where, one wonders) if he is not paid the $750k he "deserves", especially as he "agreed" to take only $100k last year (discretion is clearly not important for some - a recurring theme in the region).

Unfortunately for him, his boss was sitting two tables away. He walked over, paid his subordinate's lunch bill and then shook the hand of this 'high flyer'. He informed him that he had just been paid his bonus for the year (the bill) and that he should consider himself lucky for not being fired - at least he found out what his bonus was before most others! These sorts of hard landings are awaiting the majority financial professionals over the coming months.

Jamal Bahir (a pseudonym) is seasoned senior private equity and investment management industry veteran based in the Middle East and Europe. He is an advisor to several ruling and trading families from the Middle East, as well as select European governments and private equity funds, advising on their investment, financial and regional political strategy. The author may be reached on jamal.bahir@gmail.com.