After I received an offer to work at an investment bank, the first phone call I received was from one of my interviewing managers, asking me what my thoughts were, congratulating me on the offer, and commending me for my strength in the interview process. That’s not the point of this entry, but one needs context. I remember a phrase that went something like this — “It’s a pretty ok place to work … and the bonuses can be really nice.” I liked meeting this guy. He seemed to be both smart and balanced. He was working on some pretty cool stuff in his job, developing some neat applications and solving some challenging problems. At the same time, he had a family, and seemed to have a good family life, though we didn’t touch on that too much.
I found out, several months after I started working, that this guy had a breakdown, stopped coming to work for several months, and eventually left the bank, because the job was driving him insane and ruining his life.
Not sure any of that has any relevance, but as I said, it’s all about context.
So I’ll step back and run through my first eight months with the bank. I didn’t know anything about bonus culture at investment banks when I joined up; it was a job with a respectable company in a location I couldn’t beat. I knew that I would receive my salary, and I would receive about 14% of said salary as a signing bonus. This was nice because it meant that most of my last semester’s tuition was paid for and I didn’t need to take out another student loan. In theory, this signing bonus is meant to cover things involved in relocation that fall outside the scope of the moving accommodations offered by the bank. From what I understand, this sort of practice is pretty standard in the investment banking world.
If all of this is elementary, I apologize.
Enough context. All anybody cares about at an investment bank is their annual compensation bonus. This is true even when one is in IT, working as a cost center (support, project management, operations). Of course, when I say that they care about it, in reality nobody talks about it. I learned nothing concrete about bonuses and salaries and compensation until I had gone through the cycle myself once. It’s the thing that is going through everybody’s mind, that is being complained about at coffee breaks, that keeps employees awake at night. That said, even joking aloud “that will impact my bonus” is taboo; all one is likely to be greeted with is “what bonus?” or “here’s a nickel kid, might want to save that for February.” Even direct questions about bonuses to management are met with guarded ambiguity and misdirection.
Here’s the schoop. Ever January, each employee is called, one by one, into a director’s office (or an executive director or managing director, depending on where one is within the company). Each person is given an envelope which states how much they were paid last year, from which they can infer their bonus by subtracting their base annual salary. You weren’t actually paid that amount last year, and in fact since I started mid-year last year, this didn’t have any direct bearing on reality, but having by that point read Liar’s Poker, I had a little bit of an idea of what was going on. After telling what amount was “made” last year, it goes on to tell the new base salary for the coming year. The manager then asks the employee what they think, and being on the job for seven months to this point, they don’t know what to think of it, thus they leave the office somewhat confused, trying to figure out how this impacts their self-worth. In February, any compensation changes take effect, and the bonus is paid out, and then there is drunken blabbering about how much one’s bonus sucks.
Simple enough, right? It gets more confusing. There is a structured evaluation framework with objective setting, feedback (up, down, and sideways), and performance measurement. The rating that is produced out of this system would seem to classify one within the bank, against their peers. However, the output of this system has no bearing on reality. To digress, this goes on the assumption that reality is defined as promotion prospects, compensation changes, and the size of the annual bonus (which I am more than willing to accommodate is flawed reasoning). Instead, this framework is just that — a mechanism for communication with manager(s) and peers, but not a direct input into one’s actual status within a company.
Back to bonuses. They are somewhat arbitrary, decided in closed-door meetings at some level (still haven’t figured out quite how the whole process works, to be honest; I know there is a certain time of year when everybody goes off and argues about this stuff for hours on end). In the end, a pool is created for bonuses, and then the size of the pool is grown relative to how well management, at each level of the process, argues to have their pool increased. The fruits of this percolate down to each employee, and in theory each person gets the proportion of the pot they deserve and so forth.
I know it’s not that complicated, but as I say, this whole process doesn’t seem to be documented or talked about under regular circumstances, so I’ve put it down here to make sure I have everything straight in my mind. Now that I’ve done so, I’ll point out that the concept of the bonus is not hard to grasp, but what takes a little adjustment is the idea of just how central a bonus is to the investment banking mindset. Despite the vocal horseplay and comments that bonuses aren’t important, guaranteed, or even existent in the first place, I would argue that bonuses are the single most important aspect influencing the vast majority of investment bank employees. Merriam-Webster says:
bonus : something in addition to what is expected or strictly due: as a: money or an equivalent given in addition to an employee’s usual compensation…
That makes sense, right? Except for that little bit in addition to what is expected or strictly due — investment banking employees do not treat a bonus as something optional or as an exception to the rule. Quite the contrary; people would not work these jobs if they did not see this additional light at the end of the tunnel. The question is not of if, but of how much. Every little effort made by an employee is considered another coin in the proverbial piggy bank for which they expect to be reimbursed through said bonus. Because of this mindset, there is a feeling that after a certain point in the year, leaving a position is pure idiocy, as all of the compensation one “deserves” for the work they have done above and beyond normal expectations is being forfeited. This is all engineered by something that is not guaranteed.
Having been through this cycle once, and having had a difficult year, I am beginning to wonder if this greed-motivates-performance system is healthy. In the simple case, it gets the job done, by creating a synthetic economic market. The expectation of each employee and how much their bonus should amount to creates a synthetically higher demand for their labor, so they supply more effort to fill that demand. This is all done when in fact the synthetic demand increase may not be made material, and some or all of that surplus supply could be provided for free. Even better, if people are not receiving the compensation they feel is fair for their pain, if they know that a few people around them were compensated less for their pain (and such information does circulate), it may be enough to hold them through to the next cycle.
Now I’m going to speculate a little bit. This is not an observation of the situation I see in my job, but rather an extrapolation about the industry as a whole. I think this system makes everybody terribly competitive, and very eager to pin blame for problems on other people. It makes cost-cutting measures more important than employee morale, and as a result morale ends up being tied to bonuses and little else. It keeps salaries artificially low, as the aforementioned synthetic income shift (based on bonus expectations, rather than bonus reality) allows base salaries to be kept at substandard levels since the gap is made up for by bonuses in a good year. In effect, what has been created is a synthetic labor market inside of the actual labor market, much of which is created at a cost to the labor itself. In a good year, people hear about better years somewhere else, and want to jump ship for a chance at a bigger bonus. In a bad year, every spring marks a mass exodus and employee churn as people realize they worked themselves to death without being compensated for their pain.
Don’t get me wrong, I understand that one of the ways to motivate employees in the financial services sector to make money for their company/shareholders is to tie their compensation to the performance of their group/company. That said, it seems to me that the general trend for large financial services companies is to move away from making a killing on proprietary positions. Instead, the move towards servicing fees and margins seems inevitable. In the context of that, and with banks becoming more like corporations and less like fraternities, I’m beginning to wonder if the whole bonus system makes sense in the long run.
That said, I don’t think it is something that will ever go away. I suppose the system is self-adjusting. In the perfect world, if one remained in the financial services sector, they would work to the point at which they receive the appropriate balance of work-life and bonus effort. If they value the money more than their work-life balance, or vice-versa, the appropriate adjustments will be made. If they are more comfortable in a sector where they have fixed expectations and fixed salaries, then I suppose that is the direction in which they move.