'TIS THE SEASON OF THE BIG BONUS

Bay Street’s most successful high rollers and risk takers have visions of new German rides, high-tech toys, diamond necklaces and watches dancing in their heads By John C.P. King

The Banker who walked into the Porsche showroom on Avenue Road had only one requirement—his new car had to cost exactly $145,000. That’s how much his accountant had told him he could spend.

“He didn’t care about negotiations,” said Vincent Ho, who sold the man a 911 Carrera 4 Cabriolet in just 10 minutes. “He didn’t care about what car he was getting. No test-drive, no nothing. He just wanted to spend that much money.”

That was in 2000, the record year for bonuses in the investment industry and an excellent year for selling luxury cars. However, by 2000, Uncle Scrooge had rolled into town and even the hardest-working high rollers and risk takers of the banks and investment houses were lucky to find a lump of coal in their stockings.

Unfortunately for Ho and his high-end car competitors, coal is not a substance that is much use to them. But now they have something to smile about. The forecasts for year-end bonuses are looking good on Bay Street. Bonus pools are estimated at 15 to 20 per cent higher than last year, which itself was a return to prosperity after the sharp downturns of 2001 and 2002.

The news is reason for just about everyone in the city who sells high-end luxury items to feel good. If it’s a good year, more gold watches and diamond necklaces are sold on Bloor Street and prices go up for homes in Rosedale and Forest Hill. Among the stock and bond traders, bonuses are a hugely important status marker.

However, the satisfaction of getting the big bonus inside the investment industry appears to have more meanings than picking up a few more toys, especially for the well-established players. The status of bonuses may not strictly be in the pleasures of the spoils they may bring. Many bonuses are spent in the blink of an eye, without a lot of thought, it appears, to what is being purchased. No late nights here pouring over the latest issues of Consumer Reports.

Tommy Moulelis, who sells Audis worth up to $170,000 at Downtown Fine Cars in Yorkville, has seen how quickly the bonus cheques can be spent. “Some people drive up Avenue Road and by the time they hit the 401, the money’s gone.”

Toys and other status talismans aside, the news of big bonuses on the horizon historically has industry insiders wondering more about whether they will be cementing a superstar status or be forced to change teams over the festive season, even if they had stellar performances. For those who live dangerously on the wild fringes of the daily markets, the bonus is also a way of keeping personal score in what is an extreme sport. Just like any great hockey player, they constantly measure their performance and the bonus is the ultimate indicator of how they are doing.

Illustrations by Dav Bordeleau

“There’s a bravado thing,” one investment banker said. The stressful life on a broker’s trading desk tends to be a young man’s game. The successful ones often went to the same private schools and live in the same Forest Hill neighbourhood. “It’s key in terms of your standing in your little community. The brokers are dealing with one another—TD, RBC, CIBC—they’re all on the phone every day. People can generally tell how somebody is doing by what they’re driving, the holidays they’ve had. There’s a psychology of peer-group performance.”

Chris Hatch, a compensation expert and principal in the Toronto office of Towers Perrin, says bonuses are “a validation” of individual performance, of the type of year they have had,” said Hatch. “One year someone might have an incredibly successful year and a very, very rich bonus, and the next have very little.”

Even when the bonus pool is healthy, individual cheques can vary enormously inside a firm. If the upside potential is attractive—a few top traders might earn a bonus of as much as four times their annual salary of $50,000 to $150,000—the downside could mean no bonus at all.

“These guys work 25 hours in 24,” says Claudio Gardonio, a consultant in Towers Perrin’s Montreal office who is co-chairman of an investment industry compensation survey. “They are always linked with their BlackBerrys, always linked to the market. They are very concerned every day with what’s the market, what’s the trend, where’s the economy going. They manage billions and billions. So I believe, whatever they are worth in terms of bonuses, it’s well earned.”

Bonuses in investment banking are typically based on measurable numbers—sales volume, return on capital, how a portfolio fared against a benchmark index such as the S&P/TSX composite—with a percentage allocated to individual performance, based on the manager’s assessment.

More and more bonus plans for investment fund managers are being structured on a value comparison against an index, Gardonio says. “If you exceed the TSX index by 70 basis points for the total fund, you will get a one-time bonus. If you exceed it by 100 or 120, we’ll double this bonus.” That means most people have a clear idea as the year progresses how much money they can expect to receive by December. These guys love numbers,” Gardonio says. “On a day-to-day basis, I should be able to establish what my bonus will be if things go the way I think they will.” A sudden shift in the market, such as that caused by the terrorist attacks in the United States on Sept. 11, 2001, can throw all bets off. “But you should be able to get a really good ballpark figure if the bonus plan was well-built.”

Historically, if there is a surprise in December, it is usually because a company wants to send a signal to an employee that they want him to stay or to go. “Quite often it is used as a way to get rid of people,” one investment executive observed. “If you did well and they didn’t pay you properly, you’d get the message.” That means there is a lot of staff movement between brokerages in January and February, after the year-end bonuses have been paid. “If somebody is going to leave, they’ll obviously wait until the bonus is paid, and then they’re gone,” said the executive, who has seen the seasonal shifting many times.

Genuity Capital Markets, the newest investment bank being organized by David Kassie, former head of CIBC World Markets, has been waiting for other banks to pay their December bonuses so Genuity can announce the team of about two dozen people that it has hired for next year.

Bonuses are often used as a recruiting tool, to reel in top talent from competing brokerages. “When the CIBC head trader hires someone from RBC, part of the discussion when they agree to come along is a guaranteed bonus of X dollars,” said a former employee on CIBC’s bond desk. “And anything above that is like hockey players. You see movement from team to team and from dealer to dealer. The bonus is seen as a very strong incentive to leave a company and join another one.”

Kassie knows all about using big bonuses and other forms of compensation to attract the best. In 2000, the record year for bonus payments, he was the Wayne Gretzky of Bay Street, earning the highest-ever paycheque—$14 million, including a $6.5-million cash bonus and $7 million in shares on top of his comparatively modest $450,000 salary as chief executive of CIBC World Markets.