It’s the one day of the year that can change the lives of thousands of bankers working in the City, the day of fear and loathing that has no parallel in any industry in the world.
Bonus day is upon us, with staff in the world’s biggest investment banks set to learn what their fabled “number” will be.
Goldman Sachs, the highest payer in the banking world, tells its global partners of their “comp” (compensation) on Friday, when it releases its financial results for the year. Their teams then get the good – or bad – news next Tuesday. For partners, overall pay is expected to average more than the £3m they got in the previous year. Other big Wall Street banks’ bonus days are also looming, as they kick off the season this week for reporting their 2014 profits.
In an industry where so much of a person’s pay is skewed towards bonuses awarded on one day of the year, ritual is all.
“You should never expect to get much work done on bonus day,” says one financier. “Everyone’s either got their head in the clouds or is too angry to concentrate.”
The days before aren’t overly productive, either. “It’s basically just gossip, gossip, gossip: how do you think our team did? How did the bank do? How much did we do individually? How big will our team’s pot be?” says a former Goldman banker. “And will we get the credit for that big trade we devised, or will the guy in sales nab it all?”
In sales and trading, the Goldman bonus is said to be largely reliant on your “GC” or gross credit – basically, how much revenue you generated for the firm. Other departments have different scoring systems: in asset management (the division that invests pension funds’ and other big investors’ cash for them) salesmen’s bonuses depend on how much new client money they bring in, while fund managers’ pay is based on how much they manage to make the money grow.
In traditional investment banking – advising big companies on takeovers, stock market flotations or raising money from new investors, the “rainmakers” take a bonus cut from whatever fees the firm bills.
On Tuesday, Goldman desk heads will receive a visit from the human resources manager, who delivers sealed envelopes – one for each member of staff – containing that hallowed number.
One by one, staff are called into the office and told. Ritual kicks in again: first the manager gives an overview of how the firm did, how the department performed, and then how you fared. Finally, the number – known as the Per Annual Total Comp or “PATC” – is revealed. The breakdown of how much is in cash, how much in shares and when you can get your hands on it, follows.
“You feel so nervous. It’s by far the most important event of your life for 12 months.
“Why is it so important? Because it dictates whether or not you can afford to send your kids to the school you’d planned,” the former banker explains. “It says whether you can afford to move house this year. It says whether you need to look for a new job.”
This all seems utterly bizarre to those outside the City bubble, for whom bonuses, if they exist at all, tend to be a nice-to-have rather than a must-have. But then, says one banker: “For us, it’s not unusual at all. We live in a world where one or two transactions can completely change our way of life. Personally, there were three days last year that will entirely decide my bonus – days when we won big deals. But the deals on those days could easily have gone the other way and ended in me getting nothing.”
Recent documents from the High Court case of the Libyan Investment Authority vs Goldman Sachs allegedly detail just how lucrative individual sales can be: the Libyans claim that Goldman made more than $250m (£165m) of revenues from four trades done with just one signature. Goldman denies the figure.
While the speculation about comp numbers is at fever pitch this week, jockeying for the bonus has been going on for months. At Goldman, the process starts in late summer and autumn during the review process. Performances are assessed by managers and peers. So, while the amount of money you made for the firm is a major factor, it is not the only factor – you have to win your colleagues’ and bosses’ admiration too. In other words, it’s crucial to convince all and sundry not just how brilliant you are but also what a great team player.
At Goldman, that review is followed by another, more secretive operation called “quartiling” where staff’s bosses come up with a score of one to five. It is this which dictates the final bonus. A four or five, and you’re in grave danger of getting the boot as part of the annual cull of the weakest 5 per cent. A one or two, and you could be looking at a life-changing pay-cheque.
“A friend was once asked by his boss: what is the minimum you would accept your bonus to be for you to stay? He gave his answer. When bonus time came, he got exactly that number. So of course, he was kicking himself for not demanding more,” says one banker. “On the other hand, I once asked for three times the bonus I got the previous year and ended up actually getting less than I had last time.”
A low bonus, or a doughnut (a “big fat zero”) basically means “We want you to leave.” But forget about kicking up a stink with your boss on bonus day. In the big banks, it’s way too late by then. In fact, the numbers were mostly set before the return to work after Christmas.
Says one Goldmanite: “The performance review is when you big yourself up and make your arguments. Once you’ve been given your number, you’re not going to change their minds. So my strategy on bonus day? Keep a poker face. If you didn’t get what you wanted, work out what your strategy is later. If you’re pleased, you still leave them worrying they haven’t paid you enough.”
If it’s a good number, that walk back to the desk is a matter of desperately trying to look as though you’re not walking on clouds. Hide it at all costs. “People never discuss their bonus. Never,” says one banker. Another says this is a sackable offence.
But they will, for weeks afterwards, be madly speculating on what their colleagues got, scrutinising their reactions, digging about for an insight. For nothing bothers a banker more than getting paid less than the next guy.
One tells the apocryphal story about the banker who was delighted by his bonus. Ecstatic, he went home and told his wife; they ordered a new car, booked an Easter holiday in the Caribbean and toasted the bank’s generosity. The following week, he found out the guy next to him had got double. Utterly furious about his own rubbish bonus, he waited until the bonus cheque landed, then quit.
These days, with bank’s profits and bonus pots feeling the pinch, managers have been forced to find other ways of preventing staff from leaving. The old trick of promising a promotion instead of payment is common. At Goldman, managing directors’ posts, like partnerships, are awarded every two years. With 2015 being an “MD year”, expect a few of these glamorous new titles to be waved as carrots instead of a nice, fat number next week.
The banks will point out that pay is not up much on last year. And in the case of the banks who were hit by the biggest fines for wrongdoing, it will be down.
Meanwhile, last year’s European bonus rules, insisting variable pay is capped, mean much of the fun has been extracted from the process. Several big investment banks have got around it by offering what are called “role-based payments”. These are fixed, and bankers will already know what to expect. Meanwhile, at Goldman and other banks, bonuses will be made up of a mixture of cash and shares that will vest in three years but not be delivered for five.
But don’t pity them too much: variable bonuses will still number in the several millions for the top producers. Those Ferrari garages and Knightsbridge estate agents will be licking their lips.
Winners and losers: who gets what
Many of the titans of the City’s trading floors hoping for big bonuses had their hopes dashed by the oil price collapse and its impact on the bond and credit markets in the last three months of the year.
Word on the street, then, is that securities traders’ bonuses will be broadly flat.
So, it is to the investment bankers, who have been carrying out the big stock market flotations, fundraisings and mergers and acquisitions, that the biggest pay will go. Although these tailed off towards the end of the year, 2014 was an extremely strong year for deals.
Goldman Sachs was the top performer, so expect plus-size payola going to Karen Cook, the bank’s European president and London’s “Queen of M&A”. Headhunters say she can expect to get a bonus in the £5m-£10m bracket from her work on deals including Vodafone’s monster sale of its stake in the US business Verizon, which completed last spring, and the successful – albeit less lucrative – defence of AstraZeneca from the unwanted attentions of Pfizer.
Ms Cook, who has advised on many of the biggest takeovers in the past decade, joined the firm as head of UK investment banking in 1999 and is often said to be the most powerful woman in the banking industry – cynics might say the only woman.
Also on Vodafone-Verizon was Simon Warshaw, another big hitter, particularly in telecoms, who will have trousered a major bonus from his then-employers at UBS. After the deal he went on to partner with Ms Cook again, defending AstraZeneca, but this time with his new “boutique” advisory firm, Robey Warshaw.
In stock market flotations, once again Goldman Sachs was a runaway earner, so expect a multimillion-pound bonus for its investment banking co-head Anthony Gutman. The toweringly tall, workaholic father-of-three was a star adviser to the flotation of Merlin theme parks, Pets at Home shops, Virgin Money and the B&M discount retail chain. A colleague recalls: “Talk about a work ethic: I had an 8.30am with him recently and he’d already had two client meetings. That’s pretty typical.”
Mr Gutman and Mark Sorrell, high-flying son of the advertising mogul Sir Martin Sorrell, have been touted in some corners as potential successors to Ms Cook. Mr Sorrell was no slouch in 2014 either, working on deals including the Aviva-Friends Life merger and helping Ms Cook defend AstraZeneca. He’ll be expecting a few million pounds.
Bank of America Merrill Lynch’s director of UK investment banking and keen cricketer George Close-Brooks and his Harvard-educated colleague Craig Coben got on the tickets for both Pets at Home and B&M too, so they should be expecting some multimillion-pound “comp”, with Mr Close-Brooks also bagging a place on the ticket for the bumper flotation of Saga’s over-50s business.
Citigroup’s head of European Equity Capital Markets, Michael Lavelle, will have scored big by advising on large floats including those of Merlin and Saga. A lifelong Leeds United fan, he was one of the youngest ever bankers to make managing director grade at Salomon Smith Barney in 1998, before his 30th birthday.