As 2006 draws to a close, targets are reviewed, budgets for the following year set and the bonus pool is confirmed and allocated. In all oth...

As 2006 draws to a close, targets are reviewed, budgets for the following year set and the bonus pool is confirmed and allocated. In all other areas of financial markets a good year means a zesty bonus for those involved. But wealth management has historically been the poor relation in terms of pay and remuneration to its investment banking and corporate banking brethren. So will this year see a change in direction? The wealth management market neatly divides into two at the moment, with the formulaic houses who pay a percentage of revenue to employees on the one hand and those who hold fast to a discretionary bonus model on the other. At present we see the formulaic model as having the upper hand and will deliver stellar payouts for employees. Our major candidate deals during the year have reflected the “muscle” that exists within the formulaic houses. In contrast, the discretionary bonus paying banks have first to address P&L, shareholders, both in the UK and overseas, the increase in this year’s hiring costs before apportioning the bonus pool. There is a problem with lack of correlation between production and pay within the discretionary banks. It is wholly wrong for a relatively newcomer to private banking to be paid a derisory sum at the end of a year where they have really delivered significant revenue to the bank, but it is happening with bankers of longer standing being favoured before hot newcomers. We think that the old adage of “brokerage versus bank” is now out of date. You will now find parallel product and service in many of the historical brokerage labelled banks with a genuine desire to offer as good, if not better, products and services than the regular banks. Discretionary paying models are, though, being eroded by a tentative movement into quasi-formulaic structures. But employees should be cautious of these and examine whether they will be really better off. We see respected global names suddenly launch a new remuneration model. All too often it results in a formula where the percentage is so low and the hurdles to qualify for bonus so high, that employees are often worse off. They also often involve a resetting of the position annually and only reflect gains in genuine net new revenue after a deduction of costs. We predict a continued rise in the base salary structures next year as the quest for genuine talent hots up. But some banks have genuinely followed a policy of ignoring the movement upwards. We would also caution bankers to not get carried away with their assets under management numbers versus what they are being paid to produce them. We all too often find a banker with impressive AUM growth, who gets a buzz from that fact alone, but who then goes on to bemoan their pay deal. People used to think that they couldn’t have it both ways; what we see now is that they can. We see the discretionary model banks paying just enough to retain their workers. They leverage human inertia and pay what they think they can get away with, hoping there is not a mass or critical exodus. Equally, as hiring costs rise and bankers demand more on joining the inevitable shearing between existing staff and newcomers in terms of pay is occurring. The highest deal we are aware of this year is £1.8 million for a single UK market relationship manager with significant guarantees following in subsequent years. The hiring bank in question would be the last one anyone would suspect but the impact on their existing staff and the market as a whole will be very interesting to watch. Deals of that magnitude create significant and unique pressures on the individual, their new colleagues/existing workers and the boss who hired them. It doesn’t always end up harmonious.