Human Capital & Careers

Bankers’ Bonuses Hang in the Balance

Big bank profits in 2009 could signal a return to lavish year-end payouts. But will the firms risk a public backlash?
David McCannOctober 8, 2009

A year ago, right after Lehman Brothers collapsed and the entire financial-services industry appeared to be within sight of a similar fate, asked 1,300 bankers about their expectations for their year-end bonuses. Thirty-six percent said they expected to get a bigger bonus than they did for 2007, prompting one compensation consultant to comment, “It sounds like a lot of people are waiting for the tooth fairy.”

Fast-forward one year, and an identical 36% of respondents to the Website’s latest survey said they’re expecting a higher payout than they received for 2008. This time, though, it could be seen as a conservative response.

That’s because booming bank profits in the first half of 2009 suggest the possibility of big bonuses, notes John Benson, CEO of eFinancialCareers. Citigroup, for instance, which reported a $7.6 billion loss for the first six months of 2008, was $5.8 billion in the black for that period this year. Banks less affected by the subprime crisis are also doing better this year. Goldman Sachs, for example, saw profits rise from $3.6 billion to $5.2 billion year-over-year in the first half.

Still, what the banks will end up paying in bonuses is far from certain. Many of their top executives have stated publicly that they’re very conscious of the public’s negative mood toward the industry. Just yesterday HSBC chairman Stephen Green told the BBC, “The banking industry has not covered itself in glory to say the least, and indeed the industry collectively owes the real world an apology for what has happened.”

Financial-services professionals already have paid a price. Johnson Associates, a compensation-consulting firm specializing in the financial sector, estimated that Wall Street bonuses for 2008 dropped from the prior year by 70% for senior executives, 45% for investment bankers, and 30% for staffers in accounting, human resources, information systems, and other support functions, The Washington Post reported last January.

But Benson points out that the public’s mood toward bank bonuses is not necessarily well informed. To many, he observes, the word bonus may equate to something extra or out of the ordinary. Yet in the banking-industry context, it is simply the performance-based component of the compensation structure. “And the performance of many banks this year has been very high,” he says.

Also casting uncertainty on bonus payouts are the discussions about possible regulation of bank-compensation structure that took place at the recent G-20 economic summit in Pittsburgh. Ideas floated included a ban on guaranteed multiple-year bonuses, a ban on paying short-term bonuses relating to products with long-term maturities, clawbacks on bonuses based on sales of products that perform poorly, and paying more of the bonus in stock versus cash.

“These things are still being discussed, but I think you will see banks [on their own] adjusting the way compensation is paid,” says Benson.

In fact, the process of change is already well under way. In the eFinancialCareers survey, 52% of respondents said their firm has revised bonus policies for the next year. Many of the changes were designed to discourage excessive risk-taking; still, only 28% of respondents said their firm’s current bonus policy weakens their appetite for risk. “The attitudes of financial professionals to risk-taking is changing,” says Benson, “but it is likely to change slowly.”