Want the biggest bonus as a trader in a bank? Here's how to game the system

Maybe you’ve been in investment banking for a little while or perhaps you’ve just started your career (having successfully looked perfectly sincere while telling your interviewers that you wanted the job for ‘the challenge of the deal’). Either way, there’s a good chance that what you really want to know is this: how do I get paid the big bucks? There’s a lot of talk of ‘obscene bonuses’, but how do you get yours to be properly X-rated, rather than merely a bit saucy?

To answer that, it’s helpful to understand the way that your managers think while they coming up with the numbers. As a senior manager at Deutsche Bank, I was involved in the bonus process there for 15 years and, while I’m sure that details and pay scales vary from firm to firm and over time, the basics are constant. Let me give you a primer.

In the old days, at the start of my career in the early 1990s (pre-internet and, possibly, pre-you) the bonus process was straightforward for many products. Management would look at the trading profits on each trader’s books at year-end and multiply that number by the ‘payout ratio’ for the product. You are a spot FX trader and you made $5 million? Payout ratio equals 10%, say, so you get $500,000. For salespeople, trading profits were replaced by ‘sales credits’, but the process was similar.

The secret to being paid well back then was clear: get into a product area where profitability per unit effort or per unit risk was highest and where there was competitive demand for your services (since payout ratios were set, in large part, as a result of banks’ competing demand for traders or salespeople). Naturally, high profitability and high demand were correlated.

The rise of subjectivity

But such a simplistic approach couldn’t last. For one thing, as banks grew and the stakes got higher there was the issue of moral hazard. Two traders who both made $10m in a year might not be worth the same amount to the banks’ shareholders (economically speaking) if one of them chipped away steadily and the other was subject to wild profit swings. What was the chance that the wild man wouldn’t lose $20 million the next year? Trading style came into the equation.

For another, the world is more complex and the profits from the provision of a lot of products didn’t lend themselves to being split easily by trader. Imagine a typical series of events in a global derivatives book: a large deal is designed and executed in Tokyo, is handed over to London to hedge all day but then, ultimately, is closed out later on in New York for a big profit. Who made the money? To answer that question, complicated issues of teamwork needed to be considered.

The issue of teamwork raises yet more questions. To coordinate and lead teams, banks increasingly needed more - and more expert - managers. What should managers be paid if they’re not ‘producers’? More nebulous still, what premium should be paid to a junior employee who looks as though he or she could become a manager in the future?

So, these days, in addition to the perennial drivers of pay like the profitability of your bank, product and desk, a slew of subjective factors are taken into account by senior managers eager to retain the best staff (since their pay depends on the performance of the business as a whole). To make the judgement of the subjective more systematic, virtually every big bank has implemented elaborate tick-box systems of regular formal assessment.

The process

In my view, these systems are usually overly-detailed and so, in the FX department at Deutsche (and latterly in other business units) we supplemented the formal assessment by a simplified score measured in two dimensions.

First, how good was the employee at their current job on a scale of A to D. Of course, this took into account profitability and consistency, but also how good a team player the individual was, as well as considerations of the difficulty of the job (it is easier to make money in a big currency pair like EURUSD, say, than in more peripheral pairs).

The second dimension (on a scale of 1 to 4) was the potential of the employee to do a bigger job in the future: ‘1’ meant he or she was ready for promotion right now; ‘4’ meant ‘struggling at current level’. Naturally, A1 was where you wanted to be; D4, not so very much.

These assessments, for the entire global team, were argued over (and I mean really argued) twice every year by the full management committee, which represented each sub-product and the managers of each region. The idea was that by getting more opinions, personal bias would be minimised. A similarly collegiate process (also intensely argued) would be used to come up with the exact annual bonus payment for every employee in the global team.

Being a bit of a geek, I used to do a thorough statistical analysis of these payments each year and there were always two factors that explained almost all the variations in compensation having allowed for pool size: position on the A1 to D4 grid and tenure at the bank – the longer you’d been around, all other things being equal, the more your pay.

There was a slight premium for specialism, though. I would say becoming overly specialised is a risky strategy long-term: you might be the bank’s only expert at pricing and risk managing the ‘Three factor, triple Salchow extender swap’ but if regulations change or the product becomes unfashionable, you are in trouble. Ditto if you are a salesperson who has built your entire career covering hotshot hedge fund star Max Hammer; his downfall could be yours, too.

The issue of tenure is also a thorny one. If you are a seen as a permanent fixture (like a doormat, say) it is easier, at the margin, for your managers to underpay you. On the other hand, constant job-hopping destroys any trust that you might stick around long-term and the intermediate strategy - repeatedly holding out higher bids that you have got at other shops - gets tiresome very quickly if overdone. The middle path (desirable, yet loyal) is the one to aim for, in my experience.

To emphasise desirability, some employees believe strongly in the efficacy of the time-honoured bonus day moan. Look sad and disappointed when you are paid and your manager will pay you more next year, or so the theory goes. If you try this, make an effort to be consistent. I once paid an enviable sum to one trader whose demeanour suggested that I had just boiled his childhood pet alive. ‘Possible problem’ I noted on my pad as he left my office. Unfortunately for him, once outside, and clearly visible through my office’s glass walls, he did a small, but delighted fist-pump. I crossed out my note.

An easy recipe

So there you have it: an easy recipe. Choose a product in a firm that is profitable and will remain so long term. Make money and be a good team player. Impress upon your managers your ability to progress by taking more responsibility in the future. Act ethically at all times (since few bankers are paid much once they are fired for cause or – worse still – are languishing in jail). Be desirable, yet loyal. Oh…and become a good actor. Once you’ve mastered all that, you’ll have it made. Good luck.

Now you should probably get back to work.

Kevin Rodgers started his career as a trader in 1990 with Merrill Lynch in London before joining another American bank, Bankers Trust. From there he went on to work as a managing director of Deutsche Bank for 15 years, latterly as global head of foreign exchange. His book, “Why Aren’t They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis” was published by Penguin Random House in July 2016.