Money can't buy you loyalty
Feeding the wallets of the City `stars' may pay for their minds but their hearts will rarely follow. Jill Treanor reports on the rising cost of keeping staff
Wednesday 29 January 1997
While they may not all have become millionaires like Del boy and Rodney, all the signs point to the fact that many of them received bonuses big enough to pay off, at least, a reasonably sized mortgage.
It is easy to explain why. Last year was the year of booming stock markets and, more importantly, a record year of activity in the mergers and acquisitions field.
All these factors bring nothing but good news for investment banks, most of which are expected to report record profits for the year. It also means that the staff who brokered the deals, bought and sold stocks and provided the analysis, all joined in the party.
"If you're any good at trading and the head of a desk you're going to be pretty frustrated if you didn't make a million dollars in 1996," says Martin Krajewski, managing director of Firth, Ross & Martin Associates, a firm of City headhunters.
Many investment banks announce their bonuses around Christmas time but the staff at those which wait until the start of the new year to reveal theirs knew to expect a bonanza. The result was a phenomenal atmosphere at City wine bars around Christmas time. Even charities have benefited. At a recent annual City bash the bidding got so wild at a charity auction that investment banks and securities houses helped to raise the largest ever single amount for Save The Children.
However, while the champagne has been flowing - the proprietor of one bar near the offices of Merrill Lynch, the US broking house, has been reported as selling out of one expensive champagne label - signs are emerging that the party could all end in tears.
Regulators, for one, are starting to get jittery about the "star" culture created at most investment banks. These "stars" - the likes of Nicola Horlick, once of Morgan Grenfell Asset Management - command huge salaries and even greater bonus potential.
They also have their employers over a barrel. Even a whiff of their intention to resign causes concern and the "star" knows it. The result is a boost to their salaries and, more importantly, their bonus. Bosses around the City now expect rumours of resignations around bonus time, as employees play the game of ensuring a huge payout.
But what is of more concern is the fact the "star" can kill a business by even the threat of leaving. Nick Durlacher, chairman of the Securities and Futures Authority, the City regulator, blames the firms for allowing themselves to be held to ransom by their high-flyers.
"To some extent management have brought it upon themselves by the willingness to put so much of the reward for strong performance on individual performance and individual bonuses. The danger is that it's replaced ... loyalty," says Mr Durlacher, himself from a long line of City professionals.
"We use the word `stars' because we borrowed it from Hollywood and one can observe from casual reading of memoirs coming out of Hollywood that the stars were difficult to manage for the studios."
No one suggests that all "stars" are likely to break the rules, commit frauds or generally run off the rails. But what many experts increasingly believe is that the onus put upon them to generate large amounts of revenue in return for their bonuses may drive them to the limits, or even over the limits.
Nick Leeson, the trader now in jail in Singapore, was expecting a pounds 500,000 bonus just hours before he broke Barings; Yasuo Hamanaka, the disgraced trader at Japan's Sumitomo, had achieved "star" status.
Even Peter Young, a former fund manager of MGAM, was a star in his field. His ability to provide excellent returns on his funds apparently failed to prompt his managers to notice that he had set up a web of Luxembourg holding companies to hide the true extent of his investments in risky securities. Peter Young is now under investigation by the Serious Fraud Office.
Mr Durlacher has been on a crusade since taking the helm at the SFA to make top management take full responsibility for their staff.
Experts warn that management should keep control of any stars who emerge. Management should question them when they are making profits, not just when their luck runs out and their positions turn to losses.
What is also important is that management creates an environment of loyalty, although experts warn this is becoming difficult because of the way in which many businesses have been built up by hiring top teams from rivals.
The teams are hired on big pay deals and promises of great bonuses but this also makes them sitting targets for the next firm which is looking to expand its business quickly.
"You don't buy their loyalty. For a while you do ... until the next big offer comes along," says Phil Rivett, chairman of Coopers & Lybrand's capital markets group.
Roger Steare, chief executive of Jonathan Wren, the headhunting firm, thinks firms may be starting to realise the pitfalls. "A very hard lesson at the end of the day is that if you try to keep people by throwing money at them it doesn't work," he says.
This has not, however, stopped the annual merry-go-round job market from starting up again now that bonuses have been revealed. Finding a solution is not easy and for professionals like Mr Durlacher who have witnessed the City's transformation in the 10 years since Big Bang, the erosion of the partnership culture is key.
Before Big Bang, loyalty was less of an issue because firms were small and staff quite often locked in on some kind of partnership deal. These days investment banks employ thousands of people and, in most cases, are run for shareholders.
There is a long-surviving partnership on Wall Street: Goldman Sachs. It rarely loses staff and while some will quickly point out that this is hardly surprising given the size of their salaries, many of the staff are paid in stock in the firm. Goldman also hardly ever engages in team hires and insiders say it nurtures staff and provides career guidance.
This contrasts with Deutsche Morgan Grenfell, which has made its name in recent years as a poacher of teams. This explains why few of its rivals have sympathy over the Nicola Horlick situation. She was suspended because MGAM believed she was in the process of taking her fund management team to ABN Amro, a rival firm.
The more cynical of City observers point out, however, that even locking employees in through partnerships may not work these days. The dog-eat- dog mentality in the City and the mad dash to expand businesses as quickly as possible means rivals are increasingly likely to buy out any built- in bonuses and share deals.
The City has seen all this before and it is inevitable that the current circus will end eventually. Another economic downturn will do the trick, as would a sudden policy change like that in 1994 when the US Federal Reserve hiked interest rates.
The arrival of the single European currency is already adding some caution in the market for foreign exchange related jobs. The problem for many investment banks is what to do with perfectly good traders whose ability to second-guess European exchange rates will no longer be needed after 1999.
Mr Steare, for one, has a plan and is just beginning to work with two investment banks to keep such staff by retraining them for other positions in the firm. He hopes this will prevent a high turnover of the workforce and instil some level of loyalty in employeesn
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens