Thursday, November 14, 2013

It’s Bonus Season Again

It’s Bonus Season Again

The holiday season is quickly approaching, and you’d think that portfolio managers and analysts would be in a joyous mood.  If you believe those smiling faces are thinking about the upcoming holidays, you don’t know much about my former business.  We are now officially in the season of unrealistic expectations.  As the remaining days in 2013 dwindle, investment professionals are preparing for year-end evaluations and bonus conversations.  Some of these meetings will only take place next year, but everyone from the lowly analyst to the exalted hedge fund manager is wondering what they’ll be paid for their efforts during the year.  And partners and owners are figuring out how much they’ll have to pay out.
 
Unhappy New Yorkers (1999)
One thing is certain.  Everyone working at an investment organization is going to be distracted for the next couple of months, and the distraction will not end when the bonuses are actually paid out.  Rather than coming into work and focusing on investments and the financial markets, portfolio managers and analysts are going to be standing around the cappuccino machine gossiping about the potential size of the bonus pool.  Then they’ll retreat into their offices or cubicles to ponder their potential bonus and convince themselves that they are entitled to an outsized share of that pool.  If there’s a quantitative formula built into their bonus, they’ll be modeling their potential payout in a spreadsheet.  Expectations will be growing with every passing day.

Unless the money management firm had a particularly bad year, everyone is going to get a bonus.  Wall Street bankers and money managers expect bonuses as a matter of course.  This year, anyone having anything to do with equities is anticipating a sizable payout since the markets have been strong.  Even if a portfolio manager’s performance has been mediocre, he’s expecting a share of the bounty.  Meanwhile, the fixed income managers and traders are probably sulking.  It’s been a much more difficult year in the world of bonds.  Nonetheless, all the professionals in fixed income will still get a bonus, albeit slightly smaller than the 2012 payout.  You can expect fits of jealousy to breakout between the equity and fixed income desks.

Meanwhile, the executive recruiters will be trawling.  Once the bonuses are paid out, the most desirable employees will be free agents.  So the recruiters are busy arranging clandestine meetings where investment talent can be wooed by rival money management firms.  Even folks who are happy in their current jobs will sneak off to have breakfast with a rival hedge fund or private equity firm.  The logic is straightforward.  If their bonus is disappointing, they’ll need to go some place where people value them.  And even if their bonuses are spectacular, they can always use a job offer from another firm to force their current employer into giving them a big raise and some guarantees for 2014.  The guaranteed bonus, by the way, is a ridiculous idea.  It really isn’t a bonus at all, but a huge stipend to make sure certain people just show up for work.

The bosses will be gathered in conference rooms trying to gauge how small they can make the bonus pool and still keep the key talent happy.  Every dollar they pay out in bonuses is one dollar out of their own pockets.  They’ll also be rehearsing the script for the year-end conversation.  The idea, of course, is to find the right amount of flattery to make the employee feel great about the bonus check.  By the way, the words are almost always irrelevant, because the employee isn’t listening to anything other than the amount of the bonus.

When bonus meetings finally occur, there are three predictable outcomes:
  •       The people at the bottom of the totem pole, such as administrative assistants and mailroom clerks, will be the happiest recipients of their bonuses even though their checks will be microscopic in comparison to all the senior professionals.

  •            The portfolio managers who receive the biggest bonuses will be the least satisfied.  If the star manager gets $5 million, he’s deeply disappointed because he was expecting $10 million.  Or, if he gets $10 million, he’ll be upset because he suspects that someone else got $15 million.  After leaving the meeting, his first phone call will probably be to the headhunter.

  •             For the rest of the professionals, the thrill of receiving a six or seven figure check will dissipate by March of next year.  Once the money is safely in the bank, the portfolio manager or analyst will start to think he should have been promoted or received a big raise.


As Easter and Passover approach, everyone will finally get back to business.  Those who cashed in their bonus and took another job will be gone.  Those who used a job offer to get a big raise and a guaranteed bonus will be done negotiating the bigger pay package.  Everyone else will be sick and tired of all the closed-door meeting and intrigue.  Nonetheless, they’ll already be building their cases for huge bonuses at the end of 2014.


As 2013 ends, most people in the real economy will be happy to have a job or will hope that 2014 brings them employment.  In the world of money management, it’s time to carve up the spoils and be unhappy about your share.

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