Record profits at investment banks from an M&A and financial market boom have raised hopes for a bonus bonanza for City of London bankers, but a new survey shows only an elite few will get multimillion-dollar payouts.
The survey by recruitment firm Armstrong International published on recently sees bonuses for top performers up 15 to 20 percent from last year, but second or third-tier ranks will see bonuses flat or only marginally up.
"Damp enthusiasm is how you could best describe compensation expectations," it said. Headlines in UK newspapers have trumpeted "City bonuses soar back to boom levels," and "Bankers celebrate the return of the huge bonus," as M&A activity in Europe has surged to its highest since the 2000 dotcom merger boom.
But the survey paints a less glossy picture of this year's bonus round, in which bankers can receive several times their annual pay as a bonus, usually in a mixture of cash and stock. "The smart people in the banks are quite nervous," said Aidan Kennedy, a partner at Armstrong.
"You have to understand that the world has changed in investment banking," he said. "M&A ain't what it used to be in the integrated banks. "It's not enough that volumes are up in your area, you have to show your ability to operate across asset classes."
The head-hunter believes 2005 will not be regarded as a bumper year for bonuses by most, although there will be some steady growth on last year. The last big spike for M&A bonuses was 2000, but Kennedy said this year feels more like the mid-1990s, when M&A was just starting to gather steam.
"'Where is the margin growth for 2006?' is a concern for many managers," said Kennedy, who said banks were operating off high revenues currently, but the key question was how to sustain them next year.They are also more cautious on pay and bonuses after the experience of the dotcom bubble, which left many firms with bloated payrolls they had to slash when it burst.
Greater integration within investment banks across business lines has also created tensions that will affect the bonus process.
Bankers marketing products with higher margins than M&A to corporate clients, such as derivatives and asset and liability management tools, are geared up to produce revenue in the short term. But classic M&A bankers have a longer-term view.
"Bankers from an M&A heritage are most comfortable with pursuing long-term strategic relationships where the revenue pay off for the bank may be much further down the road," Armstrong said, adding that this had led to some friction between teams. The M&A surge, however, has seen an increase in guaranteed pay and bonus packages that were rife during the dotcom boom.
"There are even some three-year guarantees for investment bankers who bring clients to banks which want to make a splash," said Kennedy. Some second-tier banks are also paying three-year guarantees to stop bankers walking out the door to join rivals.
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