Without Bonuses, Investment Banking Doesn't Work

What do you do when your bank is hemorrhaging money at such a speedy rate that you are forced to slash bonuses, driving key employees into the arms of other firms?

UBS (UBS) has come up with a desperate answer to the dilemma: slap the offending rivals with a lawsuit.

UBS claims that boutique investment bank Jeffries Group (JEF) snatched almost its entire health-care investment banking team in a “massive, premeditated raid,” according to Bloomberg. Specifically, the Swiss bank lost the head of its health-care investment banking unit Benjamin Lorello, who seems to have brought 36 employees over from his former division.

The poaching is the second to have taken place between the two firms this year: earlier in the month, Jeffries snatched five quantitative traders in a deal driven by compensation concerns. And in an ironic twist to the latest story, Lorello once called Jeffries a “low quality firm with no track record,” according to financial blog Clusterstock.

While UBS’s lawsuit may turn out to bear strong legal merits, the bank can hardly blame its woes on anyone but itself. Earlier in the year, UBS slashed bonuses for its key employees by up to 80 percent.

Since the beginning of the credit unwinding last year, pundits and politicians alike have been largely unsympathetic of bankers who bemoan lost income from reduced bonus payments. Many even hope for a return to the days of steady, long-term focused compensation packages. But, as this case illustrates, that is just wishful thinking.

As former Goldman Sachs banker-turned-bestselling-author Tetsuya Ishikawa noted recently in a television interview:

the supply of the top bankers is not endless. If one banker is going to bring in 50 to 100 million dollars of revenue, then if a bank can’t pay him [what he wants], he’ll just walk out and go somewhere else.

The debate, and in particular the arguments put forward by Ishikawa, are well worth watching in full:

Indeed, as regular readers will be aware, I have made this very point here at BNET Finance many times. The point has not usually been taken with much agreement. As much as it might not suit the opinions of the general public, UBS’s dire straights right now reveal a crucial point about the operations of the industry: without bonuses, investment banking doesn’t work.

Comments

[swaps:]

If a bank is so badly run it is hemorraghing cash, then none of its employees are key employees.
Not one of them.
Let them go if they are so egocentric..

Jun 28 10:33 AM

[american-born:]

OK now we have these overpaid Ceo"s and their decision's have us broke and filling bankrupt bank 1---- so their money and loyality both go up the creek because they caused the problems and now bank 2 WANTS these same people ---- let me sleep on that --- night-mares and real bad dreams should be in the ZZZZZ---ZZZZ. between ceos and speculater (stock markets) --- WHY WORRY

Jun 28 12:19 PM

[american-born:]

Now don't forget the few dollars we owe the ------ and yes buy as much foriegn products as you -- you know cars - pickups, odds and end - all you can so the profits will go to other countries and unenployment can continue here in the US and our Taxes can go up faster and the rich from these foriegn countries keep buying building and land --------- 2+ 2 = who - what country - the money from hi rises goes where - O welllllll

Jun 28 12:33 PM

[lazzybum:]

I think the best way to get ride of those greedy people is to let them work for foreighn banks. US bankes can get back to basic banking business. Let the other banks take the risk and the blame when shit hit the fan.

GS's 09 revenue is slightlty more than its 06 projected revenue. Guess how much the banks 09 profit ? Since the banks are not allow to pay ridicules bonus in 09's first quarter, you'll expect 09 profit will be better than 06. The 06 profit will be 46% better tan 09's projected revenue. No, I didn't mistype. What happened ? The stockholders got screwed. Those greedy bankers are getting higher salaries, and bonuses. Why invest in any of those banks ?

Jun 28 01:40 PM

[lazzybum:]

Jeffery may get one time boost of its revenue and profit. Wait till it has to pay those guys more and more and more bonuses. See what happens !

Jun 28 01:43 PM

[Kingnukem:]

Without bonuses, investment banking doesn't work? Why pay a salary then? Besides the fact that bonuses totally distort the business goals and these particular businesses have had notoriously sorry results, I have been under the apparently wrong impression that salaries are for the work that someone is hired to perform, and bonuses are for success well above and beyond expectations.

Jun 28 02:54 PM

[Longinvestor:]

There seems to be a cost accounting problem here. Why not have these super heroes work solely on a commission per deal basis?

Jun 28 03:40 PM

[User 422083:]

Mr, Harrison fails to realize and accept the fact that Bonus dollars come from profits - and profits are also used to pay dividends and company growth. Thus. $40 million paid as bonus es means $40 million shares will receive $1 less dividend for stockholders. Who owns these companies anyway? I always thought it was stockholders! Aren't they entitled to a return on their investments risks? Wasn't it greedy unearned bonuses that caused the market meltdown world-wide?
Also, didn't every employee of the "Team Effort" contribute to making profits? If so, why should only executives get bonuses? As a stockholder I think it's time that executives were paid salaries based on performance and bonuses, golden parachutes and executive perks were cut out altogether ? If executives don't like it they should find opportunity elsewhere !!

Jun 28 04:09 PM

[jimmy46:]

Good riddance, investment bankers are parasites that contribute nothing of value to the world economy.

Jun 28 05:03 PM

[notsosmart:]

bonuses are poison.how come this lesson cant or wont be learned?

Jun 28 09:07 PM

[Michael Clark:]

Thank you, swaps. Wonderful reply.


On Jun 28 10:33 AM swaps wrote:

> If a bank is so badly run it is hemorraghing cash, then none of its
> employees are key employees.
> Not one of them.
> Let them go if they are so egocentric..
>

Jun 29 07:11 AM

[Risky Business:]

The issue is not bonuses, the issue is "total compensation". For years, banks have told employees to views things in terms of "total compensation", the bonus aspect is more of a year end retention distribution. Recent events are quickly putting peoples focus back on base comp - that's your salary and a bonus is gravy. Bankers are mercenaries, it's not an issue of getting them, it's an issue of keeping them.

Jun 29 02:22 PM

[Vercingetorix:]

The problem is not the lack of bonuses but rather the expectation of bonuses. It's time to reintroduce the greedy, incompetent, and arrogant wall street crowd to the concept of doing one's best for a salary. These bonuses come directly from the pockets of investors. Let the bonus crybabies leave, if they will. Shareholders should revolt against bonuses unless base salaries are reduced commensurately.

Jun 29 07:09 PM

[buzzin:]

I am now at the point of attempting to coalesce the general public into boycotting certain investment banks. Electronic banking allows all of us to pick up and walk out of our bank today, albeit for another bank. All we need is someone willing to orchestrate the "moral" decision to do so. Higher fees at Citi? Let's move. Higher salaries at BofA? Let's move. Leverage is what the banks used to almost bring down world economies. I think it's time we use leverage on them. Apparently shareholders won't.

Jun 30 05:31 PM

[Mark54:]

Performance based bonuses aren't inherently evil. It gives a company flexiblity in compensation costs. What is evil is the immediate bonus payout of a deal with risk. If a deal can sour in 3 years then the bonus needs to be stretched over 3 years... not paid out the quarter or year it was inked.

Jul 10 01:02 PM