City dealers' bonuses soar to pounds 315m

Risk reward: Profits made by the Exchange's member firms quadruple but danger signals on rising costs are ignored

Bonuses paid by Stock Exchange member firms to employees soared by almost pounds 100m to a record pounds 315m in the year to June, as a booming stock market lined the pockets of market-makers and brokers.

Exchange figures released yesterday, covering 250 member firms, confirmed widespread reports of huge rewards throughout the City as business volumes and profitability rose. Profits made by the Exchange's members more than quadrupled compared with the previous 12 months to pounds 719m before tax - a rise of 334 per cent - with a record pounds 338m in the first quarter of 1996.

The figures give a rare insight into the financial industry's bonuses and profit-sharing since most of the rest of the City does not compile similar data.

But many other City businesses have been sharing this year in payouts that are back to the levels of the 1980s boom years and are probably comparable with those in the securities market.

In the year to June, bonuses and profit-sharing in Stock Exchange firms averaged 22 per cent of staff costs, but hit a record of 30 per cent in the second quarter of this year compared with the long-term average of 17 per cent.

The gravy train is known to have reached fund managers, corporate financiers, foreign exchange dealers and even senior backroom staff, who are much sought after, and are often now on similar compensation packages to those awarded to the high-profile dealers in the front office.

There have been regular disclosures over the last year of multi-million pound earnings packages awarded to City staff, dwarfing most of the so- called fat cats in industry.

This has been fuelled by a merry-go-round of staff changes, with firms such as Deutsche Morgan Grenfell offering to guarantee bonuses to entice new staff to their expanding operations.

As a result of the payouts, staff costs are rising faster than any other costs, with bonuses and profit-sharing representing the biggest part of the increase and creaming off a substantial part of the rising profits.

What the Exchange called the "vibrant" market of 1995-96 contrasted with the previous year when there was a pounds 308m decline in pre-tax profits.

The 46 per cent increase in bonuses and profit share to pounds 315m in the year to this June compares with a decline of 21 per cent in the year to June 1995, when the total paid out was pounds 216m.

But although profits have soared, the Exchange report showed that the return on capital made by firms in the stock market was surprisingly poor, and firms have been withdrawing capital from the industry despite the bonanza of the last year.

The first half of 1996 saw the first significant fall in capital employed, which the Exchange blamed on restructuring in the industry and the impact of the European Capital Adequacy Directive. The report said: "Although the absolute financial performance of member firms has been impressive, it is clearly less so when compared to the amount of capital employed."

The long-term average return on capital is only 6 per cent, and "despite recent favourable conditions, the modest return over the past year would be lower still if firms had not reduced the amount of capital employed".

Other costs, such as running buildings and services and charges made between companies, have fallen, showing that the performance of Exchange businesses is being driven more than ever by the rewards for staff. Overall staff costs including salaries and bonuses have been under better control, with a 9 per cent increase. The Exchange report on member firms' financial performance said that the bonus and profit-sharing levels reflected the "benign market conditions", the entry of new firms and restructuring through mergers and acquisitions of existing firms. "These factors provided firms with both the means and the rationale for increasing their attempts to attract and retain key staff," the report added.

With 70 per cent of staff costs fixed, and with staff representing the largest single element of costs, revenue is highly sensitive to dealing profit which recorded a "spectacular" growth of 59 per cent, more than twice the 28 per cent growth in fees, while commissions rose only 4 per cent because of a continuing squeeze on rates. Firms reported they were increasingly forced to lower their commission rates.

The survey includes all those dealing in equities and equity derivatives, bonds and money market instruments, but it excludes gilt-edged market- makers, interdealer brokers and money market brokers.

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