Is the bankers’ bonus train finally going to hit the buffers?

It’s pay day once more for the financial industry. But this year something is different. Awards are widely expected to be lower – and managers are reportedly looking at other ways to incentivise their workforces

UK-based banks, including HSBC, have insisted that they do not help their clients to avoid tax (Getty Images)

Investment bankers are trained in the arts of game theory and most will know the rules of a zero sum game – skills that are likely to prove a blessing during this month’s annual bank bonus fest, which kicks off this week.

But gone are the heady days of super-sized bonuses. City bankers are set for big fluctuations in their awards this year as a volatile cocktail of bank cost-cutting, weak markets and onerous regulations delivers clear-cut winners and losers in the battle for a shrinking bonus pool.

“Generally, morale has taken a knock, with the healthier sectors within banking being dragged down by the non-performing ones,” said David Archer, a director at City recruiter Circle Square. “The problem the banks face is that there is little slack to manoeuvre in a remuneration context.”

M&A volumes last year hit their highest level since the financial crisis, but banks are still seeking to slim down in the face of mounting pressures on profits.

Wall Street’s so-called “balance sheet” investment banks – large lenders like JP Morgan, Citi and Bank of America Merrill Lynch – have all reported analyst-beating results over the past week after cutting their way to profitability. But pleasing the analysts has come at the expense of alienating their well-paid staff.

JP Morgan will tell employees in London their bonus payments this morning, but estate agents and high-end car dealerships expecting a rush of bankers through the door will be left sorely disappointed.

The US lender, led by chief executive Jamie Dimon, cut overall pay for investment bankers in 2015 by 4.5 per cent after results last week showed a drop in revenues at the division.

The corporate and investment banking unit set aside $9.97bn (£7bn) in pay during 2015, down from $10.45bn in the previous year. The division employs 49,067 staff, giving an average pay packet of $203,191 – a surprise reduction from $205,042.

The industry’s best-paying bank, Goldman Sachs, unveils annual results on Wednesday but indications from rival Morgan Stanley suggest another gloomy picture of falling pay.

Morgan Stanley said that it has reduced compensation and benefits by 17 per cent over the past 12 months – a heavier hit than at many lenders.

The bank’s compensation ratio at Institutional Securities – its investment bank – has fallen to 37 per cent. This means bankers get to keep $3.70 out of every $10 they generate for the business – the lowest level out of any of the bank’s divisions.

Europe’s biggest lenders – Barclays, Credit Suisse and Deutsche Bank – are also going through a painful period of job losses and leaner finances, leading to another bonus cull for bankers.

Credit Suisse, led by its dynamic new boss Tidjane Thiam – the former head of insurance giant Prudential – will make a decision on bonuses in early February but has indicated a willingness to slash payouts.

“A business model where you have a cyclical revenue stream and fixed salary base does not work,” Mr Thiam said earlier this month in Paris. “The business is structurally quite profitable provided the pay can go up and down. It’s the ‘and down’ that they [bankers] don’t accept.”

He is reportedly considering cutting investment banking pay by a third.

The Deutsche Bank chief executive John Cryan has also signalled frustration, hitting out at investment bankers for getting paid “entrepreneurial wages” for “turning up to work with a regular salary, a pension and probably a healthcare scheme and playing with other people’s money”.

In the face of slimmer wage packets, management are trying hard to engineer other ways to keep banking talent.

“Some tier-one banks are actively trying to buoy their staff with softer benefits, such as reviewing flexible benefits packages. But outside of increasing overheads, they are quite constrained,” said Mr Archer at Circle Square. “Improving working conditions by reviewing culture and environment doesn’t cost money, and my understanding is that this is under review in many of the banks.”

Faster promotion is another way to keep junior talent from walking out the door, according to one City headhunter who wanted to remain anonymous.

The traditional route up the hierarchy at an investment bank is to train as an analyst for three years, and then, if you make the grade, become an associate. After that, vice-president, director and managing director roles can follow before the employee starts to climb up the greasy pole to partnership.

But bonuses at these lower levels are forecast to fall this year, with the salary benchmarking website Emolument predicting a 3 per cent cut at associate level and a 5 per cent reduction in bonuses at vice-president level – creating a threat that young bankers will leave in droves.

“These guys are the most mercenary people I’ve ever worked with in my life,” the recruiter said.

To head off the mass exodus, some banks have been creative. Goldman, for example, has promoted quicker – its three-year analyst course was reduced to two years. While it appears a nice ego-boost for a 23-year-old to be made an associate, it is also a way to stop young Goldmanites jumping ship; rivals banks will not hire at associate level without the customary three years’ experience.

Barclays has also carried out a soft rejig of employment policy to hold on to staff longer –delaying bonus payouts until the end of March, instead of January. Insiders say the move is to align the payouts with the publication of the bank’s remuneration report, but others have pointed out that the move could dissuade bankers from leaving early. Most will be on three-month notice periods, meaning the earliest exit if a bonus fails to live up to expectations is early July – half way through the calendar year when 50 per cent of a potential bonus has already been earned, turning the heads of any staff with itchy feet.

As the bars and restaurants fill up again this weekend, the City will get a better sense of who has prospered and failed in this bonus round. Whatever happens, it’s likely to be a less colourful spectacle than in previous years.