I have an article in today’s Weekend FT! The theme is on how to handle bonus season with a modicum of grace, and preferably while maximising the amount of money that one extracts from Global Finance Capital’s wallet and into your own. To be honest, you lot are probably going to hate it; at least I can promise that it’s protected by the FT paywall, so anyone who is offended or outraged by it can’t say that they didn’t read it on purpose.
{ 42 comments }
Tom Slee 02.27.15 at 10:02 pm
What is this “bonus season” thing? Is it like grouse season?
Phil 02.27.15 at 10:26 pm
In the UK, the 90th, 95th and 99th centiles for pre-tax annual income fall at roughly £50k, £75k and £150k. I’m guessing the kind of people who get significant* bonuses are at least at the first of these, if not the second. So if a large majority of the people seeing this post are unsympathetic to the problem outlined in the article, you can’t really call it surprising (or indicative of any particular moral failing in them).
The argument in the article is fair enough, on the other hand.
*Meaning, ooh, let’s say 25% of salary and above. A systems analyst I know works for a bank and has had at least one bonus, but silly money was not involved. Interestingly, the workplace in question has changed over the last decade from being one with a stroppy union and predictable progress up an agreed pay scale, public sector style, to one where your salary is what you get and your bonus is what else you get, if you get it. The old style is generally preferred.
Phil 02.27.15 at 10:30 pm
Incidentally, the way the FT paywall works for me (ditto the Telegraph) is that I follow the links if they look interesting, read them if they come up, and curse and move on if I’m locked out. (So I can’t say I was deterred.) What would be the alternative – keep a running tally of how many free articles I’ve got left for any given month? Or pay? Not entirely likely, as Eliza Doolittle said.
Ronan(rf) 02.27.15 at 10:31 pm
Is it a coincidence that bonus season coincides with the Oscars and the Carling Cup final ?
Ronan(rf) 02.27.15 at 10:43 pm
I was only joking btw, not being snarky.
Phil- FT articles ALWAYS work for me through google,(with no limit) though NEVER any other way. I think it’s some get around or something. Make of that what you will.
hix 02.27.15 at 10:46 pm
Ive recently had to endure a sort of simulated version of that system (dont know if our Profs are sadistic or if they actually believe in the neolib games they play), that was horrible enough that i never ever want to be part of a real workplace culture like that. I couldnt care less if i win in that game, or if losing means to earn 10 times as much as in a normal job. It just sucks every fun out of live.
Daniel 02.27.15 at 10:49 pm
Interestingly, the workplace in question has changed over the last decade from being one with a stroppy union and predictable progress up an agreed pay scale, public sector style, to one where your salary is what you get and your bonus is what else you get, if you get it. The old style is generally preferred.
For reasons discussed here, most of the firms I worked for would find it totally impossible to operate on this model.
Daniel 02.27.15 at 10:52 pm
I couldnt care less if i win in that game, or if losing means to earn 10 times as much as in a normal job. It just sucks every fun out of live.
This is interesting too because a lot of people feel the same way. My experience has been the exact opposite – the idea of getting paid the same when the company was doing really well and you’d had a great year, as if you’d spent the year coasting and things were going to hell, would just totally eat me up. If the owners are making a fortune, the troops ought to be paid up as well.
Omega Centauri 02.27.15 at 10:58 pm
Once during what now feels like a past life, I worked for an outfit that gave out annual bonuses. The target was 10% (for ordinary smoes), the better 10% employee pecking orderwise got a multiplier on that of a bit over 2X. Then the executives plus key-key technicals got the next level 4-5 or more times that! (And those folks had stock options as well. Unfortunately the year I made it into the final category, was the year the outfit was bought out, and generous bonuses were then no more (I did get a few months worth of big-bonus, just enough so I would know what I was missing).
But, so many places just don’t have bonuses -or they are too small to effect one’s lifestyle. I suspect college profs have never seen one?Where I work now is very generous with 401K match (100%), but there is no such thing as taxable bonuses……
Omega Centauri 02.27.15 at 11:02 pm
Daniel. I found the formula bonus is equal to how much profit the company made that year, times how much credit you got a bit disconcerting. For instance if you walked on water and saved the corp from bankruptcy by your heroic actions, then 0*huge = zero! So if your contributions were gonna be variable, you wanted to time them correctly!
Daniel 02.27.15 at 11:06 pm
Yes, that is a total pain in the ass, particularly for people like me who were really good at understanding financial crises, but not all that great at the kind of bullish optimism that landed IPO deals. Couldn’t think of a way round it though.
Daniel 02.27.15 at 11:10 pm
(ie, the reason I was able to write that article is that I have always been able to maintain a degree of objectivity during really bad bonus seasons, as they tended to coincide with my individual best years. But I would certainly be financially better off today if I’d spent the years 2004-7 chasing advisory and capital markets business from Anglo Irish Bank rather than pissing and moaning about them).
Phil 02.28.15 at 12:15 am
Daniel, I’m the last person to throw a “greedy bankers” hissy fit, and I don’t think I’ve ever baled on one of your posts before (except perhaps a couple where I actually didn’t understand the words). But I gave up on the “why bonuses” article round about here:
you jack down fixed salaries to the lowest level possible — in my day, this meant £100,000 for Directors and about half that for junior ranks
You’re talking about screwing down the junior ranks’ salaries – before bonuses – ito a level that’s (a) at centile 90 nationally & (b) two successive, competitive promotions away from where I am now, ten years into an academic career (that began *after* getting a PhD). It’s also significantly more than my systems analyst friend is getting after 20+ years of (by industry standards) well-remunerated service. Hard to get a handle on the problem bonuses are needed to solve.
Or is this just like complaining about the baker’s assistants going home with free pies?
Phil 02.28.15 at 12:21 am
(PS Went back and read the rest of it. It’s non-evil and generally agreeable-with. But we are talking about some sympathy-forfeitingly-large sums of money.)
Matt 02.28.15 at 12:30 am
For the Telegraph and every other “X free articles per month, then paywall” site I’ve encountered, you can work around it by opening the article in an incognito/private browsing window. The tracking is just based on browser cookies. I’d prefer to filter Google News results to sites completely free of paywalls or register-to-read requirements, but that’s not an option. So if a Telegraph headline/snippet catches my eye I just twist the knife in journalism’s back with the private browsing trick.
john b 02.28.15 at 12:51 am
Phil: not convinced that a national scale is particularly helpful here, on PPP grounds. £50k in London buys the standard of living of what, £30k in generic-non-commutable-provincial-city. And from my experience of nationwide accounting and law firms, that’s roughly how the salary ratio for rank-and-file staff goes.
(academic pay in the UK is astonishingly bad, but that’s another story.)
Daniel 02.28.15 at 12:59 am
well, kind of comment 13, meet comment 2. A public sector job with a monopsony employer is not going to bid up wages as aggressively as a very competitive market. Particularly when that monopsony employer is able to manipulate the PhD market to make sure that there’s a constant oversupply of potential employees. Academia, as far as I can see, is a terrible labour market and more people should leave it.
Omega Centauri 02.28.15 at 4:13 am
Daniel, for most part academic and technical people, even those with top one percent brains, the chances of breaking into the top 1% income/wealth wise is probably about one percent. Its not like being an MBA from one of the top schools (one of my colleagues did that, and the schooling was not even close to challenging for him). But the opportunities to make more than a ninety to ninety-fifth percentile salary are quite limited. Sure a few may start successful companies. Some professors in the right fields can make good money on the side consulting. Thats pretty much why my ambitious friend left to go get that MBA.
Moz in Oz 02.28.15 at 4:48 am
Omega Centauri: in Oz a STEM PhD has been downgraded, but you can still leap into the top 10% of taxable incomes within 10 years fairly reliably. It’s all about which way you look – look up and you’re losing badly to people with MBAs or connections, but look down and damn the view is good from here.
The bankers bonus limit thing makes no sense to me at all, because the gap between “humble employee with bonus system” and “shareholder-director sharing the profits” is a trivial amount of paperwork. To suppose that the sort of rule-gaming sociopaths who inhabit the speculative banking sector can’t possibly be expected to understand that or take advantage of it seems wildly optimistic to me. Sure, it will be (or at least should be) complex, but FFS, those people are specifically paid to deal with complex rules and systems. That’s what they’re allegedly good at.
Chris Bertram 02.28.15 at 8:27 am
Goodness knows I’ve complained enough about academia, but if you get a proper job you get to do something that’s basically pretty interesting at a salary that’s well into the top half of the UK income distribution. So even when I moan about management, hours, student attitudes etc, I try to keep half an eye on what the rest of the population are enduring.
Soru 02.28.15 at 9:56 am
You can see why they currently pay the wages and bonuses they do; those are the kind of sums that are necessary to motivate rich people. And if those people needing motivating are only rich because of the bonuses paid, that’s a systemic issue that no single decision can change.
From an outsiders point of view (i.e. presumably wrongly, but I don’t know why) it does mean that the whole finance industry is vulnerable to not so much disruption as outright replacement by one or more companies doing what Amazon did to book stores.
From the point of view of customers, potential employees, authorities and all other stakeholders, the current system is clearly dysfunctional. Imagine instead a company that said ‘we are in the business of moving money, from here to there, from now to then, from didn’t happen to did. This is a commodity service, so we will focus on reducing costs; automate all the decision making, and locate customer service somewhere convenient. Any vast profit earned doing this is a symptom of inefficiency or corruption; that makes us vulnerable to the competition. So we will legally structure ourself in such a way to make profits impossible; the money will instead be spent on wages, expansion and further efficiency increases’.
Eli Rabett 02.28.15 at 12:51 pm
Soru, most of the “income generation” comes from flattering, wining and dining a narrow bunch of other sociopaths and convincing them you can make them richer. Not easily outsourced to machines or call centers in underdeveloped countries
Phil 02.28.15 at 1:03 pm
I’ll put my hand up as an underpaid academic; I’m also an unambitious academic, who’d rather be doing comfortable amounts of enjoyable work than working flat out & making silly amounts of money. This is probably one reason why I’m underpaid.
But this is all a side issue, because academia isn’t the outlier – not unless the top 10% of the income distribution consists of “everyone who’s had a desk job for a couple of years and not screwed up, except academics”, which seems unlikely. The message I’m getting is that the bare minimum for “junior ranks” investment bankers is comparable to the kind of salary a lot of people would hope to be making by the time they retire (and most people won’t) – and that the best way to make those people do a good job is to chuck them even more money when business is going well. I’m finding it hard to sympathise, & don’t think I’m being particularly irrational or envious.
Main Street Muse 02.28.15 at 2:23 pm
Of course there is a paywall separating this resident of Main Street from the story on surviving bonus season with dignity…
Zamfir 02.28.15 at 4:33 pm
So we will legally structure ourself in such a way to make profits impossible; the money will instead be spent on wages, expansion and further efficiency increases
Profits spent on wages are called bonuses.
DonN 02.28.15 at 4:33 pm
It isn’t unusual in mature tech companies for senior technical track folks to make 20-40% of their remuneration in bonus form. In upside years the bonus numbers grow and in downside years – erk. One company I worked at used to call it “at risk pay.” It certainly would have irritated me as well if the company had a great year and we didn’t benefit.
DN
James Wimberley 02.28.15 at 8:19 pm
Daniel in #8: “If the owners are making a fortune, the troops ought to be paid up as well.” This was the pay system for Timur the Lame, Cortez and other conquerors. Loot was the great motivator; but it required constant and successful aggressive warfare, so you’d expect it to be unstable. One big failure, and the army melts away. This didn’t happen to Timur, because he died first. But then he and his army were on their way to conquer China, which would not necessarily have worked out well for them.
Towards the end of the Thirty Years’ War, the Swedish army (by then a band of mercenaries under Swedish commanders) dropped the basic pay entirely. The soldiers were free to extract whatever was going from peasants, using the methods reported by Grimmelshausen and Callot. There was understandably a reaction; 18th-century armies fought for regular pay and were flogged or hanged for looting.
The policy objections to large bonuses in the financial sector are well-known.
(a) The indicators used create strong and distorted incentives, generally for pursuing short-term gains rather than more stable, prudent and long-term goals like “value of the company”, see stock options.
(b) Large bonuses ensure “strategic behaviour” – cheating. This includes risk-taking on the employer’s dime, and rigging the data – see Goodhart’s Law and Gosplan.
(c) The underlying profits reflect extreme market inefficiencies (asymmetric information rather than monopoly) and not the creation of remotely equivalent value for their customers and society at large.
The last point was well articulated by Paul Volcker. The ATM was invented by IT engineers from several companies, and one from banknote printers De La Rue. Mobile banking was invented by rural Africans, telco engineers and aid bureaucrats. What else has banking done for you and me recently?
tony lynch 02.28.15 at 9:30 pm
I don’t think these poor people have to worry much about retaining their dignity at bonus time.
dsquared 03.01.15 at 2:34 am
Any vast profit earned doing this is a symptom of inefficiency or corruption; that makes us vulnerable to the competition. So we will legally structure ourself in such a way to make profits impossible; the money will instead be spent on wages, expansion and further efficiency increases
Long suffering shareholders of HSBC, Morgan Stanley and Citigroup will, I think, recognise this strategy.
The ATM was invented by IT engineers from several companies, and one from banknote printers De La Rue. Mobile banking was invented by rural Africans, telco engineers and aid bureaucrats. What else has banking done for you and me recently?
Actually all these inventions are fairly useless without a massive and reliable RTGS settlement system and pretty trivial with one, but whatevs, I am loath to spoil a good laugh line.
PaulB 03.01.15 at 4:08 am
…the best way to make those people do a good job is to chuck them even more money when business is going well…
As Daniel explained, you don’t have to pay bankers all that money to make them do a good job. You have to pay them the money to make them do a good job for you rather than your competitors. If the regulators managed somehow to enforce a tight cap on total ‘compensation’ for every banker, then banking would continue much as before. But what’s a bad idea is imposing tight restrictions on ‘variable compensation’ – bonuses – while allowing salaries to float. Because banks then compete for staff by raising salaries, leaving themselves positioned even worse for the next crisis.
This is not just a theoretical objection. The bank I was working for was allowed to pay almost no bonuses after being bailed out in 2008, and responded by giving many of its staff eye-watering pay rises.
…a STEM PhD has been downgraded, but you can still leap into the top 10% of taxable incomes within 10 years fairly reliably. It’s all about which way you look – look up and you’re losing badly to people with MBAs or connections…
There are a lot of bad things to be said about banks, but one good thing is that they will hire whoever they think will make them the most money. On the trading side you don’t need an MBA, nor connections, you need an aptitude they want – perhaps for financial mathematics. Your reason not to be working for a bank should be that you’re too high-minded, or that your talents lie elsewhere, not that there are unfair barriers in your way.
Peter T 03.01.15 at 4:25 am
“Actually all these inventions are fairly useless without a massive and reliable RTGS settlement system and pretty trivial with one”
Very true, Daniel. Here in Australia the credit unions were the leaders with most of these technologies. Strangely, they still have the largest, most reliable and lowest fee network.
engels 03.01.15 at 11:29 pm
…According to a compelling new paper published two weeks ago by the Bank for International Settlements, high-growth financial sectors actually hurt the broader economy by dragging down overall growth and curbing productivity…
Joshua W. Burton 03.02.15 at 4:48 am
The only curious part of this, at least to me, is the OP’s compulsion to cross-link here. One occasionally sees an old mountain climber or fading sports legend on the circuit, earnestly expounding the secret pains behind his public triumphs at some (inspired or amused, but resolutely sedentary) corporate retreat. But those fellows are paid to do it; if they came around to talk about it on their own time, we’d find them a bit odd, and wonder what validation they had missed so badly in their own world that they just happened to come slouching idly by.
Joshua W. Burton 03.02.15 at 5:27 am
Just to be clear, @33 wasn’t any sort of a class snub: the NYU or Columbia professor who frequents Wall Street bars hoping someone will buy him a drink for being elected to his field’s national academy would be in exactly the same spot. It’s just that I have never seen it happen.
Doug K 03.02.15 at 8:10 pm
@1, very like grouse season – only the aristocracy get to play, while they contend that their game has, actually, many benefits for those who don’t get to play.. jobs ! conservation !
http://www.moorlandassociation.org/grouse_shooting.asp
that said, “more than I deserved, but less than I wanted†seems a fair summary.
my (software company) bonus is tied not only to company performance, but also to those managerial shibboleths known as KPIs (Key Performance Indicators). Many of my KPIs are not under my control, of those that are, quite often meeting the KPI is best done by gaming the work environment (http://www.bmj.com/content/315/7101/143.6) which I decline. So bonus season here too, is much like the Glorious Twelfth, a shotgun approach..
Tom Slee 03.03.15 at 4:20 am
I think I owe dsquared an apology for starting off the comments in a mean-spirited tone. After all his contributions here, he deserves better.
Phil’s comments reflect my better self’s ambivalence: on the one hand, “greedy bankers” is not a useful point of view (and I am well paid and have my own share of contradictions), but on the other hand the phrase “sympathy-forfeitingly-large sums of money” is a good phrase.
I think what prompted my mild sarcasm was that while much of the article’s POV was “we just work here” (and who among us has turned down a pay increase?) I couldn’t help but feel there was an identification with the banking world in there too – an enjoyment of the frank amorality of the rules of the game, the lack of cant, the refusal to pretent. And when bankers identify with the system, then they start to be part of the problem. Did I misread that tone?
Jim Fett 03.03.15 at 12:45 pm
I immediately thought of this article when I saw the OP
http://www.vice.com/read/coke-dicks-0000516-v21n12
It took me a while to remember where I read it. I guess these are the jobs created.
hix 03.03.15 at 6:09 pm
The sociology of it all is fascinating. And sure, all the articles are far to friendly because they deal with people at least in the upper 3% of society, no matter if they are written by insiders or outsiders. Ok maybe not the link above.
http://www.vox.com/2014/5/15/5720596/how-wall-street-recruits-so-many-insecure-ivy-league-grads
dsquared 03.04.15 at 12:20 am
Joshua W Burton: please don’t comment on my posts any more.
Layman 03.04.15 at 12:40 am
From personal experience, I’d say there isn’t an ounce of integrity in these bonus plans. When I found myself tasked with the job of convincing the board of directors that the KPIs were ill-considered, and that we actually met targets we didn’t meet, I demurred; at which point the CEO said he wanted to be paid his bonus, and asked if I didn’t also want that. Not that way, I replied. Of course, that was the end of me, at that place, in due time.
Personal experience aside, we’ve learned that these bonus programs create perverse incentives that ultimately burn the world down. By all means, let’s be sure the arsonists don’t attract attention when the loot is delivered…
Joshua W. Burton 03.04.15 at 3:10 am
I’m gone. But I’ll apologize for the personal insult to Daniel, and I can’t see any way to do so publicly except here.
Trader Joe 03.04.15 at 8:17 pm
Maybe a bit late for comments, but this seems the right venue for those who like to cringe at such things:
The idea of being a 1%-er has become sort of a common knowledge so Wall-Streeters and bankers have defined some additional dividing criteria.
A double 1%-er is a guy who is a 1%-er and his bonus, if it was a separate individual, would also be a 1%-er. A triple 1%-er is a guy who is a double 1%-er and his tax payments, if they were a separate individual, would also be a 1%-er. The Grand-Slam 1%-er meets all of the prior requirements and also pays alimony payments, which would themself be sufficient to be a 1%-er all on their own.
Told you you’d cringe.
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