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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Only tiny violins will play for the cohort of HSBC investment bankers who were sacked without bonuses on the day they expected to be told the size of their annual payout. The timing looks cold-blooded. HSBC had a reputation as one of the more benevolent employers in a sector not known for its touchy-feely human resources policies. But new chief executive George Elhedery is on a cost-cutting mission. He is merging some units and dismantling the bank’s merger and acquisitions advisory and equity capital markets operations outside Asia and the Middle East.
Most bankers think of variable pay as a permanent part of their remuneration — in effect, not a bonus at all. While such incentives are linked to performance targets, repeat bonuses are also an accepted way of tying ambitious bankers to their employer or tempting them to defect to the competition. A cool-eyed analysis suggests that, unless it had a contractual obligation to pay out bonuses, HSBC did not need to spend money trying to hang on to bankers it planned to fire.
If Elhedery has reminded his peers that “discretionary” bonuses are indeed discretionary, he may even have done a favour to the sector as a whole. Cutting bonuses ought to be a first cost-saving step for banks that are under pressure. Such decisions are easier to reverse than wholesale redundancies.
The ghost of the great financial crisis still haunts incentive-setting by investment banks, more than 15 years since its onset. In 2008, the principal problem was the one-way rewards that encouraged risk-taking among traders, structured finance professionals and salespeople. Following the implosion of the opaque products they had created and invested in, the dire systemic consequences rebounded on the economic system and taxpayers, rather than on banks and their staff.
Now, bonuses are back as an important component of bankers’ remuneration. The UK has removed the bonus “cap”, loathed by bank bosses, having exercised the freedom to diverge from EU post-crisis rules after Brexit. In practice, the cap had the effect of driving up fixed pay and reducing banks’ flexibility to adjust their overheads in bad times. UK-based banks can now promise higher multiples of fixed pay as incentives, a change that could in itself improve the attractiveness of London as a financial centre.
Banks may still chafe against other post-crisis rules, such as long vesting periods for stock-based rewards, but those structures rightly limit the potential for abuse and a new systemic crisis.
Bank bonus season used to be a festival of ugly self-promotion, backbiting and ingratitude. It is more bureaucratic and less emotional these days. That is positive. Money still talks, however. Research may show that non-financial benefits often motivate staff better, but bankers’ day-to-day work revolves around creating and trading pounds, dollars and euros. They are used to measuring relative performance and rewards in financial terms.
In areas such as M&A and capital-raising, the release of some animal spirits, encouraged by bonuses, is welcome. If the right deals and initial public offerings are encouraged, it could even contribute, at the margin, to overall competitiveness and growth. If that means enriching the bankers who bring in such business — and leaving those who underperform without bonuses in down years — so be it. After all, for every banker fired on bonus-announcement day, there will be another who was waiting until the payout reached their bank account before quitting to join a rival offering richer rewards. As the New Testament saying has it, those who live by the sword will die by the sword.
