January 21, 2004

The Day

Today is the biggest day in the banking year. There is very little chance of more than the barest minimum of work being done today. There will be many hushed conversations, private telephone calls, discreet coffee breaks. Emotions are high and will swing several times. Yes, it is bonus day.

Despite what many think, in banking the salaries are only a small proportion of a person's earnings. Given those earnings can be large, we're still talking a decent wage, but the fixed component of a banker's compensation is a low proportion of the total amount. There are several reasons for this. The main one is salaries count as an expense, whereas bonuses can be taken out after profits are declared. It's a way to flatter the profit statement. Another reason is it gives the bank flexibility - in a bad year it is far easier to cut bonuses than to cut salaries. Bonuses are not based on any formula; they are completely discretionary. This results in months of a mixture of fear and hope, reminding the right people of your myriad achievements and how crucial a job you do. In the meantime the bosses need to sit down and basically work about the bare minimum they need to pay in order to prevent staff walking about for another bank.

So the day is a mixture of waiting for the phone call or meeting in a state of nervous anticipation, followed by discussion with co-workers on how disappointed you are with the result. No one is ever happy with the result. If you were happy, they would know your price. Once they know your price, you've put a cap on your upside. So the key is to always say "It's adequate" if you're happy, or "I'm disappointed" if you can live with it, and nothing if you are so pissed off that you plan to leave.

No one stops to comment on the absurd amounts bankers earn. We don't save lives. We don't teach children. We don't find minerals, grow food, make art, build houses, tend gardens, heal the sick. We simply shift large amount of money around, taking a very small cut each time. It can be interesting, challenging. It may even serve a purpose. My standard line of rationalisation is we serve to help efficiently allocate risks in the economy. Others use the justification that we help finance Governments and companies. Or whatever. The end result is the same: a small group of people get paid large amounts of money for doing a job that has a small or even non-existant impact on his fellow man. Or woman.

But if they want to pay me well to do it, I want to let them.

Posted by Simon at January 21, 2004 08:49 AM | TrackBack
Comments

"a job that has a small or even non-existant impact"

Nonsense. Even a small loan can make a vast difference in the life of the recipient: by allowing him to buy a house or start a business. Vide the Grameen Bank in Bangla Desh. Foolish or corrupt lending can squander immense sums; in some cases ravaging entire national economies. Also it can subsidize destructive economic practices.

If banking was easy, bank managements would lay off their unnecessary staff and make even larger profits.

(The commingling of employee bonuses with corporate profits you describe is, I think, unique to Hong Kong with its lack of corporate taxation. No U.S. bank would do that.)

Posted by: Rich Rostrom at January 22, 2004 05:49 AM

Fair points, except not all banking is about lending money. In fact these days much of a bank's job is other activities such as credit cards, investment banking, private banking and the like. I also never said it was easy, in fact far from it. It's a highly competitive game with much at stake financially. And there often are sweeping lay-offs in order to improve profits in banking, regardless of talent and ability.

Lastly the paying of bonuses below the bottom line happens in almost all countries, including the USA. They declare "net profits" and then pay out of them. It has no impact on the tax position of a company because it occurs after profits are declared.

Posted by: Simon at January 22, 2004 09:42 AM
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