eFinancialCareers

Sarah Butcher, editor of eFinancialCareers, on why now may be a good time to go for that guarantee.

Constitutional affairs minister Harriett Harman has disparaged City bonuses for being “excessive”. That being the case, now may be the time to lock yourself in at a truly immoderate level.

With only two months to go until the end of the year, all the indications are that bonuses for 2006 will be at the least very good and more than likely very great. Net earnings were up over 60% at Goldman Sachs in the first nine months of this year, 23% at Lehman and over 100% at Morgan Stanley.

Can such prodigious levels of profitability persist? As veterans of 1987 and 2002 will attest, the wincingly obvious truth is, they can’t. And as profitability levels fall, so, inevitably, will bonuses.

The intimations of the crunch to come are already in the ether. In a report released this week, the Securities Industry Association predicts profits from the US securities industry will hit $25.6bn (£13.7bn) for 2006. Next year, the SIA predicts industry profits will drop 20% as falling margins, reduced deal flow and the strains of producing ever more abundant proprietary trading profits, bite.

There aren’t (to my knowledge) any financial instruments designed specifically to hedge against the dangers of plummeting bonuses, but there is at least one way of arranging to be paid an “excessive” amount no matter what: move jobs and demand a one-(or preferably two-) year guarantee.

Those best placed to do this are in one of the frothiest areas of the market – leveraged finance.

HSBC reputedly paid £13.9m over two years when it nabbed a senior leveraged financier from Morgan Stanley last July. Whether this generous payout is fact or fiction is open to question, but when profitability is squeezed and pay is trimmed, people on guarantees will still merit the “excessive” accolade when all around are reduced to mere moderation.

Sarah Butcher, The Editor