Bonuses

[MaxAndRuby]

Can anyone clear something up regarding bonuses please?

I know next to nothing about the financial world, so sorry if it's a stupid question.

Although RBS has made a crazy loss, and politicians are up in arms about bonues, surely those bonuses will be paid to individuals who have actually made money? Whilst it's obvious that the board of the company should get nothing, and loss making CDS paper traders shouldn't get them, but if a guilts trader/dollar trader/etc has made a profit then surely it's ok for them to get a bonus?

Is that not how it works?

[theaxe]

That is pretty much how it should work. Bonuses also go to hardworking back office people who keep the banks running through good times and bad. The only exception are those on contracts that state their minimum bonuses. These are usually people 'poached' from other firms who needed a bit of security before making the move.

TBH I'm not sure what all the fuss is about. Most of the big bonus guys I know get a substantial amount of their bonus in stock and so have seen their net worth plummet over the last year or so.

Edited by theaxe on Monday 9th February 15:13

[Tycho]

I heard on the news that some people had bonuses built into their contracts no matter what.

[NDA]

The issue is broader I think - the executives at RBS (for example) wouldn't have a job if it weren't for the money pumped in from you and me. Therefore it seems unpalatable on one hand to save their jobs with our hard earned cash whilst on the other rewarding them. Smaller banks would have simply collapsed and these chaps wouldn't have had a job...

It is also the case that commissions/bonuses paid were for selling or buying debt that was toxic. In other words, recklessly doing deals that seems optically attractive but you only had to scratch the surface to see that the deals were poisonous.

[Soovy]

Generally bonuses are paid against pre-agreed targets and milestones being met. If they are acheived, you get paid out.

There are guaranteed bonuses - these are usually given to people who an orgnaisation really want in order to secure them.

[MaxAndRuby]

Soovy said:

Generally bonuses are paid against pre-agreed targets and milestones being met. If they are acheived, you get paid out.

There are guaranteed bonuses - these are usually given to people who an orgnaisation really want in order to secure them.

So for example a dollar trader will get small basic + x% of gross profit of his trades?

[Fittster]

Soovy said:

Generally bonuses are paid against pre-agreed targets and milestones being met. If they are acheived, you get paid out.

A) How sensible are the targets?
B) How much wriggle room is there regarding if the targets were achieved?
C) In the public sector you see the weakness of targets (e.g. NHS manipulating waiting lists to hit targets) does the same occur in financial institutions?

[Fittster]

MaxAndRuby said:

Soovy said:

Generally bonuses are paid against pre-agreed targets and milestones being met. If they are acheived, you get paid out.

There are guaranteed bonuses - these are usually given to people who an orgnaisation really want in order to secure them.

So for example a dollar trader will get small basic + x% of gross profit of his trades?

Doesn't that lead to a rick of recklessness as the bonus is far more important than the salary.

[MaxAndRuby]

Fittster said:

MaxAndRuby said:

Soovy said:

Generally bonuses are paid against pre-agreed targets and milestones being met. If they are acheived, you get paid out.

There are guaranteed bonuses - these are usually given to people who an orgnaisation really want in order to secure them.

So for example a dollar trader will get small basic + x% of gross profit of his trades?

Doesn't that lead to a rick of recklessness as the bonus is far more important than the salary.

I don't know that it does work like that, but I would've thought that a commission structure like that would lead to more sensible trading, as your wealth would be directly linked to the bank's profit.

[theaxe]

I think some banks have moved to a system whereby the trader's P&L gets charged some nominal fee for risks. Almost like an additional hedge cost.

So (simplistically) if a trader risks $1000 to make $100, his p&l would see a 'risk charge' of $50 (or something) to make him consider the risks more.

[deckster]

MaxAndRuby said:

Fittster said:

MaxAndRuby said:

Soovy said:

Generally bonuses are paid against pre-agreed targets and milestones being met. If they are acheived, you get paid out.

There are guaranteed bonuses - these are usually given to people who an orgnaisation really want in order to secure them.

So for example a dollar trader will get small basic + x% of gross profit of his trades?

Doesn't that lead to a rick of recklessness as the bonus is far more important than the salary.

I don't know that it does work like that, but I would've thought that a commission structure like that would lead to more sensible trading, as your wealth would be directly linked to the bank's profit.

The problem is that although you get rewarded (bonus) for doing well, there is no commensurate penalty for doing badly. The difference between trading conservatively (and only getting a small bonus) and taking big risks which don't come off is very small, whereas if the big risks fall in your favour then the rewards are potentially huge - so there is very little financial incentive to trade conservatively. Of course it's more complex than this, but in general the way that bonuses are structured is almost guaranteed to encourage risk-taking.

I have no idea what the answer is, and I don't for a second begrudge these huge bonuses to people that have earned it - but I can't help thinking that there must be a better way

[off_again]

MaxAndRuby said:

Although RBS has made a crazy loss, and politicians are up in arms about bonues, surely those bonuses will be paid to individuals who have actually made money? Whilst it's obvious that the board of the company should get nothing, and loss making CDS paper traders shouldn't get them, but if a guilts trader/dollar trader/etc has made a profit then surely it's ok for them to get a bonus?

There is an argument that says the money should build and only if there has been a clear profit made. I work for a public US company in the sales department and hence we have to go through some serious hoops to get what is referred to as 'revenue recognition'. Its OK, but we must demonstrate profit. However, the same works for a sales man here - he shows profit at the end of a sale in the first month. Rev-req rules say its OK. 2 years down the line and its all fallen apart and the whole deal was a loss, what do you do then? Reclaim the commission? Revise your figures you have submitted to the stock exchanges? It sounds easy in principle but the reality is very different.

The same goes with RBS. At the time, the trades (remember in competition with other banks, traders, investment houses, hedge funds etc) made money. That built to the end of the year and hey presto, lots of money made. The difficulty is that a lot of certain types of those trades were actually on bks commodities. They were worthless and ultimately exposes the bank to massive losses. Yes, its problem, but the trader at the time didn't know it was rubbish. Why should he pay the penalty now? In many cases, the traders simply didn't know, so why should they be penalised for something that was out of their control - especially since they worked their arses off for 12 - 16 hours a day for a year. Yes its a nightmare, but these are people and its like saying they have had a lottery win only to take it away again.... not pleasant.

The bigger concern is the risk factor. Clearly not enough risk analysis was done to fully understand the exposure and dangers involved. Some, not all, banks ploughed into the melee and sunk their noses into the trough of profit; as they thought. Only later did they realise that it was poisoned. Other banks took a more restrained view and assessed the risks, they played with the profiteers, but only with enough money they could 'afford' to lose. Hence people like Barclays made a profit and RBS a massive loss.

The concern is the risk, management of risk and diligence that these people take in their approach. Not with paying some hard working banker a nice bonus. Not his fault that some cock screwed up and told him to make money on something that was worthless.

[MaxAndRuby]

off_again said:

MaxAndRuby said:

Although RBS has made a crazy loss, and politicians are up in arms about bonues, surely those bonuses will be paid to individuals who have actually made money? Whilst it's obvious that the board of the company should get nothing, and loss making CDS paper traders shouldn't get them, but if a guilts trader/dollar trader/etc has made a profit then surely it's ok for them to get a bonus?

There is an argument that says the money should build and only if there has been a clear profit made. I work for a public US company in the sales department and hence we have to go through some serious hoops to get what is referred to as 'revenue recognition'. Its OK, but we must demonstrate profit. However, the same works for a sales man here - he shows profit at the end of a sale in the first month. Rev-req rules say its OK. 2 years down the line and its all fallen apart and the whole deal was a loss, what do you do then? Reclaim the commission? Revise your figures you have submitted to the stock exchanges? It sounds easy in principle but the reality is very different.

The same goes with RBS. At the time, the trades (remember in competition with other banks, traders, investment houses, hedge funds etc) made money. That built to the end of the year and hey presto, lots of money made. The difficulty is that a lot of certain types of those trades were actually on bks commodities. They were worthless and ultimately exposes the bank to massive losses. Yes, its problem, but the trader at the time didn't know it was rubbish. Why should he pay the penalty now? In many cases, the traders simply didn't know, so why should they be penalised for something that was out of their control - especially since they worked their arses off for 12 - 16 hours a day for a year. Yes its a nightmare, but these are people and its like saying they have had a lottery win only to take it away again.... not pleasant.

The bigger concern is the risk factor. Clearly not enough risk analysis was done to fully understand the exposure and dangers involved. Some, not all, banks ploughed into the melee and sunk their noses into the trough of profit; as they thought. Only later did they realise that it was poisoned. Other banks took a more restrained view and assessed the risks, they played with the profiteers, but only with enough money they could 'afford' to lose. Hence people like Barclays made a profit and RBS a massive loss.

The concern is the risk, management of risk and diligence that these people take in their approach. Not with paying some hard working banker a nice bonus. Not his fault that some cock screwed up and told him to make money on something that was worthless.

Good post, thanks.

[NoelWatson]

MaxAndRuby said:

and loss making CDS paper traders

What is one of these?

[Horse_Apple]

MaxAndRuby said:

Can anyone clear something up regarding bonuses please?

I know next to nothing about the financial world, so sorry if it's a stupid question.

Although RBS has made a crazy loss, and politicians are up in arms about bonues, surely those bonuses will be paid to individuals who have actually made money? Whilst it's obvious that the board of the company should get nothing, and loss making CDS paper traders shouldn't get them, but if a guilts trader/dollar trader/etc has made a profit then surely it's ok for them to get a bonus?

Is that not how it works?

Correct in your view for the most part.

Sadly, Director remuneration packages of the last decade have generally been structured along the US lines of being pretty independent of positive performance. This will I'm sure and certainly hope change.

Also, most staff actually recieve artificially low basic salaries and the bulk of the conventional bonus is merely the remainder of their basic paid as a lump sum. The banks like this as it gets staff on cheaper rates and allows them to hedge their bets in case of a slump in earnings. Or to force staff to take half their income as stock, which is cheaper for the bank.

The reality is that Direcotrs need to go back to the old method of genuinely only being paid for adding value. They can be paid as much as they want for hitting sensible targets but should not be paid regardless of any value added.

Middle and back office staff should have increases in salary to reflect fair value and not be exposed to the risks of a bonus culture. They should also have no undue preasure to take stock in lieu of cash.

Banks should cut bank on many lavish expenses, although that will happen naturally.

Only sales and traders whould be on performance related bonus structures so as the bank can attract the top people in the industry.

In essence, 10 years ago it would be the salesmen of top traders who would be the big earners at a bank and the directors would be way, way behind them. But, greed and US practices have seen board level remuneration go far to high.

Having said that, a US director will probably take home in a fortnight what a UK one will.

[MaxAndRuby]

NoelWatson said:

MaxAndRuby said:

and loss making CDS paper traders

What is one of these?

Credit Default Swaps. Insurance for companies who lend folk money.

[MaxAndRuby]

Horse_Apple said:

MaxAndRuby said:

Can anyone clear something up regarding bonuses please?

I know next to nothing about the financial world, so sorry if it's a stupid question.

Although RBS has made a crazy loss, and politicians are up in arms about bonues, surely those bonuses will be paid to individuals who have actually made money? Whilst it's obvious that the board of the company should get nothing, and loss making CDS paper traders shouldn't get them, but if a guilts trader/dollar trader/etc has made a profit then surely it's ok for them to get a bonus?

Is that not how it works?

Correct in your view for the most part.

Sadly, Director remuneration packages of the last decade have generally been structured along the US lines of being pretty independent of positive performance. This will I'm sure and certainly hope change.

Also, most staff actually recieve artificially low basic salaries and the bulk of the conventional bonus is merely the remainder of their basic paid as a lump sum. The banks like this as it gets staff on cheaper rates and allows them to hedge their bets in case of a slump in earnings. Or to force staff to take half their income as stock, which is cheaper for the bank.

The reality is that Direcotrs need to go back to the old method of genuinely only being paid for adding value. They can be paid as much as they want for hitting sensible targets but should not be paid regardless of any value added.

Middle and back office staff should have increases in salary to reflect fair value and not be exposed to the risks of a bonus culture. They should also have no undue preasure to take stock in lieu of cash.

Banks should cut bank on many lavish expenses, although that will happen naturally.

Only sales and traders whould be on performance related bonus structures so as the bank can attract the top people in the industry.

In essence, 10 years ago it would be the salesmen of top traders who would be the big earners at a bank and the directors would be way, way behind them. But, greed and US practices have seen board level remuneration go far to high.

Having said that, a US director will probably take home in a fortnight what a UK one will.

Thanks, so all this uproar about RBS paying £1BN in bonuses is largely nonsense because much of it will just pay a lump sum to make up a reasonable total package, and the non-stellar earners will be screwed without it?

[off_again]

MaxAndRuby said:

NoelWatson said:

MaxAndRuby said:

and loss making CDS paper traders

What is one of these?

Credit Default Swaps. Insurance for companies who lend folk money.

Wasn't this the things that nearly took AIG to the brink of disaster?

Never deal in something that you do not understand. It might seem a good idea, but knowledge is power and if you don't have the knowledge, its only a matter of time. I am surprised that others haven't been caught out - but hey, its amazing what you can hide in a big companies accounts.

[MaxAndRuby]

off_again said:

MaxAndRuby said:

NoelWatson said:

MaxAndRuby said:

and loss making CDS paper traders

What is one of these?

Credit Default Swaps. Insurance for companies who lend folk money.

Wasn't this the things that nearly took AIG to the brink of disaster?

Never deal in something that you do not understand. It might seem a good idea, but knowledge is power and if you don't have the knowledge, its only a matter of time. I am surprised that others haven't been caught out - but hey, its amazing what you can hide in a big companies accounts.

I believe you could say that AIG were 'exposed' to this area.

I think they're the biggest credit default insurers [clarkson]IN THE WORLD[/clarkson].

[NoelWatson]

MaxAndRuby said:

NoelWatson said:

MaxAndRuby said:

and loss making CDS paper traders

What is one of these?

Credit Default Swaps. Insurance for companies who lend folk money.

For corporate backed CDS? Are you sure this is where the losses have been?