The most excruciating banking bonus round for years

It's never easy allocating bonuses in investment banks, but this year's bonus round is shaping up to be the most challenging for years.

US banks begin reporting their third quarter results this Thursday when JPMorgan announces, but the direction of travel is already clear: M&A and equity and debt capital markets bankers have seen their revenues collapse. Equities sales people and traders have done ok, especially in equity derivatives. Large UK-related losses in recent weeks not withstanding, fixed income sales people and traders have done best, especially in macro. 

Speaking on the MacroHive podcast, Dave Newman, a former head of macro trading at hedge fund Moore Capital and senior salesman at Credit Suisse and JPMorgan, explained the trials of high level bonus negotiation in investment banks. 

As a "very large team manager" on the sell-side for years, Newman said he spent a large amount of his time trying to get his "people rewarded for their efforts." In 1998, during the LCTM and Asian crisis, JPMorgan's FX business had a record year and "made a mint", said Newman. However, the pay pool had to be spread across other lower performing areas of the investment bank. Emerging markets had a terrible year. "What do you do, do you not compensate the people in emerging markets and let them go to Goldman Sachs and Morgan Stanley?", asked Newman, adding that the "give and take" of bonus negotiations in this situation, "can be incredibly taxing."

In 2022, investment banking divisions are the emerging markets desks of 1998. Heads of desks in macro are going to be loath to give up their bonuses to equity capital markets bankers who haven't done a deal for months. And yet, Newman said this is the game. As a senior manager in a weakly performing area, he said, "you are imploring other senior managers to see beyond their business."

Equally, during down years, Newman said it's incumbent on managers to communicate to team members that they understand that they've been working "incredibly hard for their clients, for the franchise, and for their families and that you want to do right by them." This in itself is a huge amount of work, and it's made more difficult by the fact that it requires an understanding of how people are feeling. "There's a lot of psychological personnel management in order to keep a team motivated and performing," said Newman. That work is especially necessary for junior employees, who don't understand how things pan out across the business cycle, and who simply look at their friends at rival banks and see them earning more, he added. 

This year, though, it's not just about ECM and M&A managing directors begging crumbs for their teams: heads of fixed income also need to keep their people happy if they're going to prevent them leaving for hedge funds.  Anthony Dewell's recent move from Goldman Sachs' commodities trading business to Millennium is a timely reminder that large multi-strategy hedge funds are on the prowl. Less well-publicized was David Flowerdew's exit as co-head of rates at Morgan Stanley in New York to Millennium in August. After recent weeks, traders who helped clients navigate the chaos will expect compensation; hedge funds will be waiting to pick them off if not.  

Photo by Dan Smedley on Unsplash

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