$2 Million Bonuses Do Nothing For Performance. Europe Is Finally Killing Them.
BY MARK GIMEIN | APRIL 11, 2013 11:03 AM EDT
For most white-collar workers, there’s a compensation tool that accomplishes almost everything we want from incentives. It comes at the end of a year of good performance. It encourages employees to stay longer to realize its full benefit over several years. It can be deployed as needed to retain key personnel.
It is the “raise.”
Years ago, in the upper echelons of corporate life, the plain old raise gave way to “incentive pay.” To some extent, pay reformers brought it on themselves. Through the tax code, the U.S. in 1993 largely eliminated pay over a million dollars that wasn’t tied to performance. For CEOs, compensation experts like Harvard’s Michael C. Jensen pushed the pay-for-performance line. One of the key justifications for big CEO pay? The need to compete with bonuses on Wall Street.
Now on Wall Street and in the City, the places where the mega-bonus emerged, it seems to be on its way out, helped along by European legislation. And no document explains why better than the report on Barclays’ business practices released last week. Prepared by Rothschild vice chairman Anthony Salz, the report, which hasn’t gotten much attention in the U.S., includes a wealth of detail about how much bankers get paid.*
So let’s get to the good stuff.
Managing directors at Barclays’ investment-banking unit get paid a base salary. It’s typically £150,000 to £300,000. Whether you think that’s high or low may depend on your income bracket. Now here’s what comes on top. For the average managing director, according to the report, the bonus was 350% of base salary in 2011 and 210% in 2012. That means £150,000 to £300,000 turns into £675,000 to £1.3 million for 2011, or just about $1 million to $2 million. That’s down about about 30 percent for 2012. A related data point: In 2010, 728 employees received over £1 million ($1.5 million); 428 did so in 2012.
Maybe the most stunning number in the Salz review is that in 2007 bonuses made up 94 percent of managing director pay. That’s slipped down to 78 percent in 2011** and 68 percent in 2012. The report notes that the change reflects both increases in base pay and reductions in bonuses. It’s hard to unpack the numbers further; there’s no handy clip-and-save guide. It isn’t surprising that Barclays wasn’t eager to provide one.
Here’s what’s clear: Nobody truly believes anymore that those bonuses were anything but just another word for “really big salary.” The clincher: Only 32 percent of Barclays investment-banking employees thought that pay reflected performance. That share is lower than at other Barclays units, a sign that the people getting the big bonuses had a good sense of how thin the fabric of “incentives” was.
Here’s what’s clear: Nobody truly believes anymore that those bonuses were anything but just another word for “really big salary.” The clincher: Only 32 percent of Barclays investment-banking employees thought that pay reflected performance. That share is lower than at other Barclays units, a sign that the people getting the big bonuses had a good sense of how thin the fabric of “incentives” was.
All the restrictions now put on bonuses after the recent backlash–longer vesting periods, payment over several years–make them work more and more like raises. So why are investment banks eager to continue them at all? Maybe because the bonus is a way of paying out a much larger share of bank profits as compensation in really good years than the company could afford in ordinary ones. In effect, this gives the senior employees some of the benefits of being part of a partnership, a structure that investment banks abandoned with the Lazard Ltd. IPO in 2005.
Now British bankers are sobbing that new European rules limiting bonuses to two times salary will spell the end of London as a financial center. That’s not the case. As you can see from the latest Barclays numbers, many managing directors are already close to that point. Remember: a bonus that is two times salary means that salary is just one-third of your compensation.
more:
http://go.bloomberg.com/market-now/2013/04/11/even-bankers-dont-believe-mega-bonuses-reward-performance/
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