There is a word for the people in banks who are particularly unhappy with their bonuses this year. They are the “franchise" men and women: the people whose production is deemed the result of the seat they’re sitting in and the bank they’re working for, rather than any effort of their own. Their numbers are growing.
“It’s the franchise men who are getting penalized this year,” says one London-based fixed income headhunter. “- It's the journeymen who are only making modest P&L given the value of their seat. This year they're really suffering – there’s not enough money to protect these guys. Banks are just trying to reward the stars.”
So far, only U.S. banks have announced their bonuses for 2017. European banks will follow in the next few weeks. Among, U.S. houses, Bank of America's fixed income division is a case in point. Both headhunters and insiders report widespread disgruntlement with many salespeople receiving bonuses 10% to 15% lower than last year. "Morale has gone down the drain," says one salesman. However, a macro headhunter said the top rates traders at the bank have been paid: "The people I've spoken to there were all happy."
Jon Terry, a PwC partner who consults on financial services pay, says this year's allocation of bonuses is simply the culmination of a trend that's been gathering pace since 2012. "Banks are more discerning than they've ever been," he says. "- It's not that banks are going out and saying we want to pay a lot of people nothing or nearly nothing. It's more that they want to pay certain amounts to people who are particularly high performing and that this has resulted in a need to be much more discerning at the bottom end."
Not long ago, the bottom-enders would have been given a 'nominal' amount, says Terry: "In the past, people might have been given £20k. Now banks are much more comfortable paying little or no bonus, rather than paying a bonus that's mediocre."
It’s a trend that's being repeated across the market. In equity research, where banks are doing their best to keep their big names happy so that they can sell research written by celebrity analysts under MiFID II, the stars are receiving bonuses that are up 10%. The rest are flat, or down. “The differentiation will be even bigger next year,” predicts one equity research headhunter. “For the moment, banks are waiting to see how MiFID II pans out.”
As banks become more discerning in their allocation of bonuses, the problem for people in front office banking jobs is that the number of "franchise" seats is spreading. With technology costs rising and market share in sales and trading consolidating in a few big banks, it's become harder both for an individual to make significant P&L above the "seat cost" and then to claim personal responsibility for doing so. UBS has yet to announce its bonuses, but during last week's investor call, CEO Sergio Ermotti said the bank is both cutting costs and spending an extra CHF1bn on technology over the next three years. It's not alone: from Goldman Sachs to Credit Suisse, the emphasis now is on developing higher-margin, lower cost electronic trading businesses. Human salespeople and traders who used to claim credit for their P&L are now being either displaced or subsumed by the franchise.
Perversely, Deutsche's traders and salespeople may be most protected in the coming bonus round. Despite indications that pay at the German bank could be woeful (again), the head of one sales team says most of his staff will be looked after when the bank announces in March. "85% of my people will be pleased," he says, adding that they need to be rewarded simply to stave off an exodus after two years of penury.
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