Tensions run high over City payouts

Tensions run high over City payouts

By Lina Saigol, European M&A Correspondent

Published: November 14 2006 22:01 | Last updated: November 14 2006 22:01

Tensions are running high amid the rainmakers and shooting stars of the City as bosses at some of the world’s biggest investment banks decide who should pocket multi-million dollar bonuses.

The process is always fraught. But this year it will produce an unusually sharp division between those who produce real revenues and those coasting on the mergers and acquisitions boom.

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Although bonuses across the board are expected to rise between 10 and 35 per cent, only the stellar performers in high-margin growth areas will receive the big payouts. “The best people will be paid so well that rival banks won’t be able to hire them away,” predicted Matthew Osborne, partner at Armstrong International, the European executive search firm that carried out the survey.

Individual high-performers across structured credit, equity derivatives, fund derivatives, commodities and corporate finance will see increases of up to 30 per cent for year-on-year bonuses.

However, because of stronger differentiation at below managing director levels, second and third-quartile performers should expect bonuses that are flat-to-down on 2005 levels. Last year bonuses increased between 15 and 20 per cent across the board.

The surge in M&A has helped boost bonuses for corporate financiers. The biggest rainmakers in the sector will see payouts increase by up to 35 per cent, with top European heads raking in between $8m and $10m (£4.2m-£5.3m). Top country heads will earn more than $5m, while sector heads can expect to take home between $3m and $4m.

Managing directors will also be able to make up to $3m, while the broader pool of M&A bankers will be paid up to $1.3m.

Oil, gas and power commodity traders are also expecting fat bonuses. These traders, who buy from producers and sell to industrial consumers around the world, will receive payouts of between 15 and 20 per cent.

Top performing traders of structured credit products can expect to take home between $2m and $3m, while global heads of credit derivatives will receive north of $4.5m. Even the more junior structurers could earn an unprecedented $700,000.

Calculating compensation for equity research, which is still treated as a cost centre within most investment banks because it does not produce direct revenue, continues to create challenges for managers. Some research analysts can expect to receive bonuses of 20 per cent, with top managing directors receiving $1m payouts. However, many will be disappointed since, while revenues have increased, so have fixed costs.

In equity sales, bonuses are expected to be up between 20 and 35 per cent, with the focus on retaining key people.

Underwriting volumes have increased this year, despite a slowdown in the second and third quarters, and those responsible for debt capital markets efforts across Europe can expect payouts north of $4m. Good junior performers will expect to be up 15-20 per cent on last year, while even managing directors not managing significant teams could take home up to $1.5m.

Compensation in interest rate sales remains lucrative. Those with demonstrable records and relationships will receive total compensation of between $2m and $3m, while a small number of individuals will receive more.

At the vice-president and director level, however, those without a strong personal franchise who have relied solely on the strength of the platform will see their compensation range from $500,000 to $1.5m.

Key players in equity derivatives can expect to rake in a healthy part of the bonus pool, with stars receiving as much as 8 per cent of their personal production.

Demand for fund-linked products in Asia and the US has boosted bonuses for fund derivatives specialists, with expectations reaching 25 per cent for the top performers.

However, due to the shortage in talent at the associate and vice-president level, these bankers may see an increase of between 30 and 60 per cent.

The private bankers will also enjoy a large share of the bonus pool this year, as strong equity markets have underpinned wealth creation and the consequential asset inflows into Europe. Expectations of increases range from 20-25 per cent on last year.

This is the first year of Goldman Sachs’ new pay structure, under which bankers are no longer paid a commission but instead receive a salary and a discretionary bonus. Morgan Stanley and Merrill Lunch continue to pay bankers a percentage of revenues from all their accumulated assets under management.

Although the mood among the bankers is buoyant now, in the coming weeks those who have shared a spirit of camaraderie for the rest of the year may find it wearing thin if they are among the losers come bonus day.