Bay Street Bonus Anxiety

You can see it in their faces as they walk, in a fog, through the underground PATH network. A combination of fear and hope. It’s that time of year again: bonus time at Canada’s investment banks.

For most of 2007, the heads of the i-banks have been “conditioning down” the bonus expections of their various teams. On the equity trading desk, high volumes have been undercut by lower per share commissions. The i-banks suffered the loss of the income trust bonaza last Hallowe’en, and for all the M&A activity this year, the revenue hole hasn’t been totally filled; at least not at every shop.

For those fearing the worst – an exit rather than a nice cheque – this is the worst possible week. Having killed yourself all year, working 48 Sundays and 30 Saturdays, only to find out that one Vice-Chairman isn’t in your corner. My advice is simple: don’t make your calls to prospective employers on your cell phone from the main floor of your own office building, everyone knows what you’re doing as you pace back and forth past the Mercedes parked in the lobby of First Canadian Place.

The rumours are all over the map: good Canadian results undercut by weak performance at the U.S. divisions. Great M&A revenue, a decent IPO market in some sector but losses in structured derivatives, credit products or commodities. The internal PR campaigns have been inventive as well; one firm is telling its employees that the CEO made a generous bonus pool recommendation, but the parent’s Board of Directors “cut it back”.

That might be true, but Bank Boards have waited years to reduce the overall comp of the investment banks, given how tied the firm’s total revenues are to debt facilities rather than individual coverage relationships.

In the U.S., UBS has publicly-stated that its CEO has “waived” his bonus for 2007. No surprise given the US$11 billion writedown and need for an emergency equity injection from the Government of Singapore. A month ago, UBS advised its biggest hitters that they’d be getting stuffed with stock comp, rather than cash, this bonus season:

Rumours are flying thick and fast about the likely structure of bonuses at UBS this year.

UBS has already officially indicated that it will be paying a higher proportion of bonuses in stock after reporting its first quarterly loss for half a decade and predicting a full year loss for its securities unit.

More colour is emerging on what this ‘higher proportion of stock’ might look like. According to one headhunter, the bank has indicated that it will pay 75% of bonuses above US$500k in stock and 100% of anything above $2m in stock. She says UBS is compensating for this by offering stock recipients a shorter vesting schedule.

Both claims are unconfirmed by the bank itself.

Even worse: deferred cash?

Another rumour is that UBS plans to defer paying part of the remaining cash element of its bonuses until 2008. This has been categorically denied by the bank, but one headhunter says it would make sense – both for UBS and elsewhere.

“It is very possible that those banks hardest hit by credit losses will find it necessary to pay greater proportions of bonus awards in stock this year, and probably even defer the cash elements of the bonus over the next 12 months,” he says.

It won’t be the first time that banks have withheld cash payouts. ABN operates (or operated before it jumped into bed with RBS and some Spaniards) a deferred cash scheme. Dresdner K famously deferred a proportion of its traders’ cash bonuses in 2006 on the condition that they met additional performance targets. Guess what? Several traders left as a result.

CNBC’s David Faber had a cute story last week about the Wall Street Trader who told his boss, when advised that his bonus would be US$10 million, responded: “I’m disappointed”. Here’s some advice that the “Poison Dwarf” once gave to a bunch of us at Nesbitt: “Whatever the bonus number is, it’s always a ‘three’ [out of 10].”

Best of luck to all of our friends and allies at the dealers.

MRM