The problem
Investment banks are likely to dash the hopes of many staff in the latest round of bonuses, as fallout from the US subprime crisis continues to destabilise credit markets and hit third quarter revenues.
Some banks may try to retain star performers by allotting them the lion's share of the bonus fund. Yet such a policy often sows resentment among the rest, and many lawyers expect a rash of bonus-related claims in coming months.
What is the best course of action for executives trying to allocate a smaller bonus pot? And how should they manage expectations to prevent mass defections or legal action?
The advice
The executive
David Freud
Stop thinking of investment bankers as human beings (even though some of them may be). They are assets, like property, for which there is a going rate. If you get this rate appreciably wrong the assets will simply get up and leave. Announcing, like Stephen Green at HSBC five years ago, that bonuses for analysts are too high and will be cut out entirely may look good in macho PR terms, but it is a sure-fire way of losing core staff.
In bad times you can expect a lot of signalling about what rivals are paying and preparing to pay. It helps at this point to be at the back of the announcement queue. If the allocated pot leaves you "out of the market", don't try to average out the discrepancy. Take some tough decisions on which departments and individuals are not performing.
Don't target the youngsters; the savings come from the notional big hitters. And don't spend too much energy trying to manage expectations. For these assets the message is all in the cheque.
The writer is a former vice-chairman at UBS Investment Banking and author of Freud in the City.
The academic
Jonathan A. Knee
Institutions, like individuals, like to present a narrative storyline to the outside world that captures their core values and characteristics. Under normal circumstances it is rare for the veracity of that self-image to be tested.
For investment banks, the moment of truth comes with the kind of downturn the industry now faces. Whether these firms rise to the occasion and make bonus allocations consistent with their articulated principles will have a lasting impact on how they are seen by staff and clients.
The problem facing investment bankers in dividing a suddenly scant bonus pie reminds me of the joke about academics: their politics are so ruthless because the stakes are so low.
Encouraging long-term client relationships, teamwork and entrepreneurial thinking are values that can be overwhelmed by feverish jockeying among banking fiefdoms looking to protect their turf.
The biggest risk today is not that "star performers" should get more than their fair share:
The writer is adjunct professor and director of the media program at Columbia Business School and author of
The Accidental Investment Banker.
The lawyer
Caroline Carter
The good news for investment banks with a presence in London is that most City bonuses are discretionary. Employees need to show that their employer exercised its discretion irrationally or perversely to challenge a bonus award.
Helpfully, two high profile cases against investment banks this year held that where an employee's bonus depends on the discretion of the employer in fluctuating market and labour conditions, an employee requires an "overwhelming case" to persuade the court that the level of bonus payments is irrational or perverse.
Nevertheless, the risk of discrimination claims remains. To manage it, executives should lay down objective, non-discriminatory criteria for the allocation of awards. When paying more to star performers, make sure this is justifiable in line with the criteria. And staff must be given the reasons for a small bonus award and the criteria on which it is being awarded.
The writer is partner and head of employment, incentives and pensions at Ashurst
The consultant
Peter Christie
Experience of past situations - 1991, 1997, 2001 - provides some pointers for relative success this time round. Have clear criteria for an award; ensure that all performance review decisions are arrived at fairly and free of bias on any grounds.
Know your key talent - categorise those who are absolutely critical to retain in the firm, irrespective of how their business has performed, and target the bonus pool at those people.
Differentiate aggressively between different categories of people - the successful firms allocate at least 50 per cent of their bonus pool to the top 20 per cent of their talent pool. Act sooner rather than later - the City is high-reward, high-risk, so cut the headcount now to ensure there are fewer people to share the bonus pool.
Consider other reward mechanisms - share awards, deferred cash awards and pension contributions may, if structured appropriately, have a lower cost to the business this financial year. And make sure people have realistic expectations of the eventual decisions.
The writer is director of reward consulting at Hay Group
