Morning coffee – bonus caps are actually good! Boutiques work better than convex brackets if you can | Popgen Tech

At the end of a rather dismal bonus year, UK investment bankers may be able to take some comfort from the fact that their local regulator is lifting the cap on bonuses, among other pieces of European legislation that a post-Brexit government could do without. Left-wing newspapers are suitably appalled, and it’s a return to the good old days. Or is it?

Researchers at the Bank of England have crunched the numbers for the past decade’s regulatory returns for “Substantial Risk Takers” (bankers whose pay must be reported separately), and they appear to have confirmed as fact what the smartest cookies in the industry have suspected for some time. When the bonus limit is introduced, the total salary does not decrease; it simply rebalances from variable to fixed compensation. British and European bankers generally do not earn as much as their American counterparts in good years, but they are somewhat insulated from the effect of bad years, and the two effects appear to be roughly balanced.

Not only that, but another effect of capping bonuses—requiring bonus payments with large deferrals and clawbacks—actually increases total compensation. The researchers point out that future cash flows must be discounted and return risks must be compensated for, and the implicit premium paid to account for this is actually quite large.

All this is quite intuitive and should convince us that the employment market is at least generally efficient. Front-office workers and serious risk-takers exist in a global job market that includes hedge funds, private equity and boutique firms. The balance of that market is determined by overall supply and demand, and adjusting the structure of compensation packages in a subset of a regulated industry does not change that balance.

Except that… maybe it is. Notably, the Bank’s researchers limited their analysis to risk takers who had at least three years of data. This matters and could have affected their results because the smart cookies in the industry know that in order to benefit from a deferred compensation scheme, you have to stick around to receive it.

The deferral system is effectively a tax on job transfers, and potentially quite a substantial one. Much of this tax falls on employers – they have to factor in the cost of buying back packages of laid-off people, and this has been known to bring down some high-profile figures such as Andrea Orsel. Few people manage to collect one hundred percent of all the bonuses they receive during their career.

And by making it more difficult to leave an employer, the system is likely to make this efficient market less competitive. It’s harder for bankers in hot sectors to jump from firm to firm and push for the highest rates, and so the overall level of compensation in the industry is likely to be a bit lower than it might be in a truly free market. Perhaps the end of the bonus cap is worth celebrating for London bankers after all.

Elsewhere, the general feeling that some consulting boutiques haven’t had as bad a year as their larger rivals appears to be based on the facts. According to data from Refinitiv, boutiques ended the year with a 36% share of total M&A fees, compared with 34% for the convex group. And of course the nature of the industry is such that the income from that 36% is shared among far fewer hungry mouths.

Unfortunately, this may not be as good news as it seems for managing directors who dream of quitting next year and hiring an office with two or three of their old friends. Part of the reason for this trend is that firms like Lazard, Evercore, and Moelis are pretty big themselves these days. It is not at all clear that “true” boutiques in the old-fashioned sense of the world have become any more viable as a business model, and at their current scale, mega-boutique banks are less able to grow by gaining market share; they are just too big. As Breakingviews analysts point out, Boutique Boulevard is not the new Wall Street.

In the meantime…

“Many organizations make the mistake of recruiting by reacting too quickly in tough times, given the time it takes to re-recruit good people,” says JPM’s Charlie Jacobs. Although headhunters and banks are expecting more layoffs, this will not necessarily affect top-end pay – good people are still in short supply and in high demand. (Financial News)

Credit Suisse has finally lost patience with Inside Paradeplatz, the Swiss banking gossip site. Their lawsuit basically says the comment section went too far into personally abusing CS employees and encouraging customers to leave the bank. (feet)

Celebrating long lunches as a way to help colleagues make connections and relationships that might otherwise be missed in the world of remote work. (Bloomberg)

The investment banking industry can forget that the best bankers are often poor, smart kids who are much more driven and ambitious. Need to recruit more people who didn’t come through silver spoons and elite universities (FT)

Meanwhile, the tech industry, which also has an eye on elite universities, is starting to worry about the “non-kids.” In companies where the founders gave themselves shares with disproportionate voting rights, control could be maintained for generations. And as someone points out, “how do you fire Mark Zuckerberg’s children”?. (feet)

​Although Wei Zhou called himself Binance’s “Chief Financial Officer,” he may not have had access to all of the company’s books in his three years on the job, which seems like an inflation of the title. (Reuters)

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