Canadian bank headquarters stand on Bay Street in Toronto.Brent Lewin/Bloomberg
I pity the investment banker who decides to throw a hissy fit over this year's bonus payment.
Canada's six bank-owned dealers just turned in stellar results, collectively posting profits of $7.8-billion for fiscal 2016, a 5-per-cent increase over the previous year, on the back of strong takeover activity and a surge in equity financings from utilities and energy companies.
Bonus pay did not keep pace. Variable compensation paid out by the six big banks totalled $12.8-billion, up 2 per cent from $12.5-billion last year, according to data from Bloomberg. That was the skinniest increase in payouts seen in the past six years. Individual bankers will sit down with their bosses this week and next to find out how big their slice of the bonus pie will be. Some will be disappointed.
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For example, bonus pay is down by approximately 2 per cent at Royal Bank of Canada, in step with a slight dip in profits from the country's largest capital market group, even though RBC remains a market leader in M&A, equity and debt underwriting. National Bank drained the bonus pool by 3 per cent, according to Bloomberg's data. Bonus pay was flat at CIBC, year over year, while Bank of Montreal and Bank of Nova Scotia should see the most smiles, as they increased variable comp by 8.4 per cent and 7 per cent, respectively.
Top talent is always going to engage in a little paycheque poker with the bosses, negotiating for the best possible deal. But these days, the odds are stacked in favour of the house.
Investment bankers who were unhappy with their bonuses have two cards to play. The employee's first ace, one that is easy to play, simply involves showing how their individual talent and relationships brought in business. The second card – one that is far more dangerous to put on the table – is to threaten to leave for greener pastures, either a global firm or an independent dealer. Both these arguments for a bigger bonus lost relevance in recent years.
When it comes to client relationships, banks have made a conscious effort to replace the individual with the institution. Large corporations look to investment banks for a range of services, from credit to M&A advice, stock sales, derivatives and currency trading. The same is true of a large institutional investor: Fund managers call on a range of analysts, traders and sales teams. No one banker dominates client coverage, which means no one employee enjoys much leverage over the bank.
Threatening to quit for a rival dealer is likely to get a laugh from the boss. Where are you going to go? At this stage in the cycle, foreign dealers are firing, not hiring. The ranks of the independent dealers have been thinned, and the likes of Canaccord Genuity, Cormark and GMP Securities cannot offer the lucrative payouts that used to drive compensation right across the rest of the Street.
And when it comes to paycheque poker, investment bankers have lost the ability to bluff. Bay Street's financiers used to take home all their pay in cash. Over two decades, this has evolved into schemes that now see the six big Canadian dealers hand out approximately 60 per cent of each year's bonus payment in the form of deferred compensation. There are shares or units that vest over time, typically three to five years. Quit early and all that deferred comp is lost. These schemes were introduced to align the interest of bank and banker. While deferred comp achieves that goal, these long-term payouts are golden handcuffs.
As bonus cheques are handed out and the holidays approach, investment bankers should be toasting the fact that variable compensation is 2 per cent higher this year. Step back and it becomes clear that industry trends are not friends to those who work on Bay Street. Technology is as disruptive to corporate finance and fund management as any industry; over time, fees will continue to fall for services such as trading, risk management and underwriting. While it's easy to look back fondly on paycheques past, the reality is this was a very good year on the Street.
Andrew Willis