Rolling a Donut

Eddie Braverman's picture
Eddie Braverman - Certified Professional
Rank: The Pro | banana points 21,143

If there's one thing that gets bankers up in arms this time of year it's the notion of rolling a donut. Imagine working all year long and not being handed an envelope at bonus time. That seems to be the big fear on the Street this year, with upper management at many banks preparing their employees for the worst.

Wall Street bonuses are likely to be down 22% to 28% this year, according to Options Group, an executive-search and consulting firm. The drop follows last year's much-criticized surge in banker pay and highlights growing uncertainty on Wall Street ahead of regulatory scrutiny and weak financial markets.

Firms are claiming that lower bonuses this year are offset by increases in base pay over the past two years, but that is mostly at the senior level. Junior bankers' all-in comp is still well below 2007's high-water mark, and base pay is still roughly what it was then - if not somewhat lower. So how do you cope with the idea of lower, or worse - no - bonus this year?

I'm not looking for a bank vs. bank bonus debate, what I'm really curious about is how you guys would feel about doing away with the bonus system altogether. How big an incentive is it for you, really? Would you rather just work for a fixed amount and not have the anxiety every January? What about phasing in bonuses at the, say, 2nd year Associate level and making comp incrementally more dependent upon rainmaking as you rise through the ranks?

In other words, would you still want to be a banking analyst if you knew your total comp figure right off the bat? If you knew that you were going to make $110,000 for the year, no more and no less, would you still do the job? I guess what I'm asking is, how big a motivator is the year end bonus for you?

And what happens if you roll a donut this year?

Comments (14)

Jan 4, 2011

I think I might be willing to work if bonsuses started at 1st year Associates, but you have to take into account the huge motivational factors that a bonus creates. They can easily get that person to do that extra 10-25% because his compensations literally depends on it---the banks have their employees sacrificing family, social life, and sleep for the company and all they have to do is promise X--literally X. A guy on Wall Street works so hard because he has not idea what X might be, and people will always go that extra step in hopes that that ONE extra thing they did will get them a higher bonus. If you pay a employee a higher base,you remove that motivation. Once a banker is guaranteed a salary and has no incentive to stay later working on that pitchbook, I guarantee that productivity will go down.

Jan 4, 2011

I agree with Gekko to a degree, that productivity might go down if you remove that "X" which motivates junior bankers to put in that extra 10-25%. However, I feel that if you had a guaranteed base, let's say the $110,000 that Eddie mentioned and then introduced the bonus as you moved up in ranks, you would still try and put in that extra "umph" every night working on pitch books because if you didn't, you wouldn't be the one selected for the promotion.

I want to believe that banking, for the most part, is still a meritocracy like most jobs in this country (US), so if you work harder and smarter and your superiors see it, you can count on being selected to move up to that echelon where the end-year bonus will come into play on top of your $110k base. If I knew that were the case, I would still work just as hard.

Jan 4, 2011

+1 On Gekko's post.

This business is all about incentive to work. If you remove the bonus the quality of work will go down, gauranted.

Not to mention these new scheme's for paying bonus, I remeber reading/hearing, they would pay them(bonus) over a 2 year period. IE so what you make in 2011 will be paid over 2011 and 2012 so its get proglonged. To me that is a bit.... as the french would say, 'shit'. It obligates you to stay with the firm (I am guessing) for until you get your bonus. In a industry where people move around a lot, its defenitly a confining constraint.

The other option I heard was stock option's which is tied to the performancec of the firm, and so if your working for a team now (for example HY) and the rest of the bank is preforming poorly your bonus is going to take a serious hit due to your bonus being paid based on the over all performance of the company.. once again not the best idea if you ask me.

If I may... to add to this post, what do you guys think the new bonus pay-out lay-out will look like?

  • Only time will tell....
Jan 4, 2011
koske:

+1 On Gekko's post.

This business is all about incentive to work. If you remove the bonus the quality of work will go down, gauranted.

This was absolutely true for me. The only reason I cared enough to stay late and make sure things were done right was the fear of not maximizing my bonus potential. If I knew I was going to get paid no matter what, I would have said f'it a number of times. Staffers and deal teams will lose a substantial amount of leverage over their analysts if the bonus system is replaced. This may actually be a good thing and cut down on the amount of BS that analysts have to put up with. I was lucky enough to hit my 3rd year as an analyst in 2007; I couldn't imagine doing what I did for a donut.

Jan 4, 2011
koske:

+1 On Gekko's post.

This business is all about incentive to work. If you remove the bonus the quality of work will go down, gauranted.

Not to mention these new scheme's for paying bonus, I remeber reading/hearing, they would pay them(bonus) over a 2 year period. IE so what you make in 2011 will be paid over 2011 and 2012 so its get proglonged. To me that is a bit.... as the french would say, 'shit'. It obligates you to stay with the firm (I am guessing) for until you get your bonus. In a industry where people move around a lot, its defenitly a confining constraint.

The other option I heard was stock option's which is tied to the performancec of the firm, and so if your working for a team now (for example HY) and the rest of the bank is preforming poorly your bonus is going to take a serious hit due to your bonus being paid based on the over all performance of the company.. once again not the best idea if you ask me.

If I may... to add to this post, what do you guys think the new bonus pay-out lay-out will look like?

That is how stock bonuses are paid already. People get part of the compensation in cash and the rest in equity. The equity is strucutured so that you get half of it the next year and the other half the following year. The equity builds up so that on lets say year 3 a person gets years half of years 1 and 2 compensation along with cash from year 3. That equity is what makes it difficult for firms to hire experienced guys during the bull markets b/c they need to compensate they guy for losing those 2 years of equity. It also is one of the reasons that lots of guys move during recessions--their equity "leash" has been removed/

Jan 4, 2011

The current system is pretty stressful, but mostly because expectations are built into bonuses. At some point (well before I ever got on the street), a bonus wasn't just a bonus and was an expected part of your total comp. The funny thing is, is that banks should really be able to stiff their employees or drastically reduce their bonus pools in bad years, to the extent that banks should almost never have an unprofitable year. Yet banks are scared to do this, or even drastically reduce them- seriously, we are talking bonuses being down 20-30%, not 70-80%- no one employed is eating ramen.

Its tougher for junior guys, I remember what it was like making 60k and having that just be enough of to get by. The first year bonus just really gave some breathing room, I remember the day my second year's bonus was deposited- I finally felt like I was getting ahead. That was after two hard years though, and doing the living with roommates thing and I certainly wasn't making it rain anywhere. If I got donuts those years, I might have decided to take up drinking.

For many, not enough focus has been on base salary. When I made a move last year, I made sure to get a nice base that I was comfortable with, and could live within. In previous years I wasn't as concerned. But really, you should ALWAYS be able to cover your lifestyle with your base salary. Live modestly, and pay cash for everything- when you actually have to write a check out, not just make payments, a 3 series looks a lot more practical than an S class, and if you get canned, its not going to ruin your life. I did actually hear stories of donuts being given out after the .com crash and traders filing for bankruptcy. You know what's really baller? Owning shit outright.

Jan 4, 2011

What about no carrot - all stick?

I think we all agree that the prospect of a bonus is what makes us give 110%. What if firms went to a fixed comp but guaranteed that 15% of the class would be fired at the end of the year? Would you work just as hard to keep your job?

In other words, would the negative motivation be just as effective?

Jan 4, 2011
Edmundo Braverman:

What about no carrot - all stick?

I think we all agree that the prospect of a bonus is what makes us give 110%. What if firms went to a fixed comp but guaranteed that 15% of the class would be fired at the end of the year? Would you work just as hard to keep your job?

In other words, would the negative motivation be just as effective?

What you are describing is a Jack Welch-type system- he fired the bottom 10% of managers and rewarded the top ones with promotions and bonuses. I think it worked well for a long time.

The debate on comp structure has to be broken down by department as well as seniority level. It makes little sense to give junior guys bonuses that vest over 5 year periods.

Jan 4, 2011

That already basically happens with the fixed curve and the rankings. The bottom 10% automatically get the lowest ranking. I believe analysts are given a year or two to improve, but associate and higher have a year to improve or they get fired.

Jan 4, 2011

I bartended through college and lived off of tips, ie: commission, and honestly, there's no way in hell I ever would have put out the effort I did for only an hourly rate. If you want people to GENERATE REVENUE, you have to cut them in on the action or forget about it. The douches in salaried gov't positions don't get it / don't care / are jealous.

It's a pay to play system and it's not going anywhere

Jan 4, 2011

Firms are claiming that lower bonuses this year are offset by increases in base pay over the past two years, but that is mostly at the senior level. Junior bankers' all-in comp is still well below 2007's high-water mark, and base pay is still roughly what it was then - if not somewhat lower. So how do you cope with the idea of lower, or worse - no - bonus this year?

Actually, this is why I originally moved to NJ- I did not want to depend on a bonus to save 20% of my income every year. (Also, I am fundamentally opposed to paying city taxes that can be legally avoided.)

If everyone starts complaining, I think I'm going to spend money saved in years' past to scoop up some property close to the PATH train and start renting it out to disgruntled bankers. :D

See, this is what I have been talking about with the $20 jeans, moderate rents, and thrifty lifestyles all along. Some people called me crazy for it, hehe. But if I get a $0 bonus this year, it might change how I work/who I work for, but between my savings, dividends, and thrifty spending habits, it will not really change how I live. In fact, with a $0 bonus, I will probably be able to live better next year than last year because of investment income. And that's a really good feeling.

  • WUnderful
  •  Jan 4, 2011

What about a reverse bonus? High base salary and then take away money from that. Indirect, but avoids a lot of issues.

Jan 5, 2011

Its all about the bonuses. We all know that a bankers work hours are substantially higher than the industry average. Its not just a 9-6/10-7 job. Bankers, specially at the Analyst and Associate level have to do away with lot of their social lives, working over weekends, 90+ hours a week. A fat bonus at the end of the day is an incentive for making them do the crazy work. Spl in BB where ur life is entirely dedicated to the firm, a pay package makes the whole difference. The base pay cannot be held a factor for reduction in bonuses (spl w.r.t. India where the base pay is not very high when compared to other industries). If its not about the bonuses, what would really excite the banker about his job?

Jan 5, 2011