Reap what you sow. Over the last 20 years, the ever-aggressive Wall Street culture has moved even further towards prizing, and paying for, individual performance. Even at the famously team oriented Goldman, after the trading side of the firm became the dominant profit engine, top executives would reportedly describe the investment banking side as “socialist” since it recognized that its successes were based on cooperation and compensated accordingly.
Now we have an interesting conundrum: individuals who produced good results in this terrible year. At Goldman in the early 1980s, this phenomenon was recognized and shrugged off: “better to do a C job in an A year than an A job in a C year”. But with institutional loyalty a thing of the past, these big producers expect to be paid, and will presumably try to quit if they think they were stiffed.
But where would they go? Any firm receiving a bailout is going to find it hard to offer a juicy guarantee. Hedge funds, the usual destination of the disaffected, are shrinking. There are always special situations (say at a family office) but these are few and more important, may be pulling their horns in on risk and thus may not be willing to put enough capital at risk in a particular strategy to generate a meaty return.
From the Wall Street Journal:
Behind headlines of record losses, a small group of Wall Street traders on commodities, currencies and interest-rate trading desks have made huge profits for the banks that employ them. That is setting up a scramble as traders vie for dwindling pools of bonus money once heaped on such top performers….
Shaken by the global financial crisis and increasing government oversight, banks are groping with a new way of doing business: Pay out huge sums and risk public ire and perhaps more government intervention. Pay too little, and tempt defections or insurrection from the few people who are driving this year’s profits…
Yves here. That is not the right question. The one to ask is “can these individuals realistically make a similar contribution for each of the next two years?” Or did their market present unusual opportunities? Yes, they may have successfully exploited them, but if they are unlikely to continue to generate outsized profits. losing them would not be a horrid outcome. But the belief is that at least some big earners can continue to produce:
The rough-and-tumble commodity markets, for example, delivered a much-needed assist to Morgan Stanley and Goldman.
The two banks are struggling with declining stock prices and questions about their long-term business models. But the firms’ little-publicized commodity-trading desks could add perhaps as much as $1.5 billion to each firm’s 2008 bottom line, say people familiar with their results. That could potentially contribute as much as a third of Goldman’s and Morgan’s projected net income.
The year’s three hottest trading areas — commodities, currencies and interest rates — generally are housed within banks’ fixed-income trading divisions, which also typically include the hard-hit mortgage-trading and credit-derivative products. That is dragging down potential compensation for even the best performers.
That doesn’t sit well with consistently profitable divisions. While Morgan Stanley’s chief financial officer cited the commodities-trading group on an analyst call this year as one of the bank’s “two top businesses,” some traders in the unit in the past have argued that the commodities group is undercompensated relative to its contribution.
Michael Karp, CEO of Options Group, says he is telling many high-performing traders that if their bonuses “are flat from last year, they should be pretty excited, even if they’ve had a much better year.” The best traders at top-tier commodities and currency desks made $10 million to $20 million or more last year, and the next level down, traders who brought in $100 million in revenues, might have made $4 million to $5 million, he says.
Generally, traders look for bonuses of up to 10% of profits they made for a firm, with adjustments for the performance of the unit and the overall firm. This year, an oil trader who brought in several hundred million dollars or more in revenues to his firm might still get $20 million, but much more of it will be in stock.
Yves again. Note how leverage is playing into the calculus:
Mr. Dolfino says star foreign-exchange traders who expected to make $25 million this year after earning the firm $250 million may get less if it isn’t clear the feat can be repeated without the use of borrowed money….
Many firms’ foreign-exchange and interest-rates groups — which act as brokers for clients managing currency and interest-rate risks and make bets in those markets themselves — also are expected to post stellar results…
Yet the world’s banks are keen not to appear to be funneling billions of dollars in government aid into bonuses, especially with government officials sending subpoenas over bonus plans. E