Don't bank on a bonus

As banks are planning further staff cuts, they and their lawyers should prepare for a rise in claims for pro rata bonuses '“ and working out who is entitled to what is likely to require the involvement of employment claims experts.

While policymakers have been working on swift, internationally coherent and decisive measures to restore confidence in the global financial system, almost all the major investment banks have announced redundancies, with more planned as Christmas approaches.

The world of front-office investment banking has always been seen as a high-adrenalin career where the earning potential is recognised as a reward for a job that is both demanding and stressful. Most entrants only plan a relatively short career in the City (10-15 years, typically) before moving on. The problem is that it is all too easy to get used to the money and the lifestyle which in reality are financial handcuffs.

Litigation on a grand scale

As an expert witness, the problem I see charging towards investment banks is simply that they are failing to recognise that staff who lose their jobs this year are expecting a pro rata bonus, and litigation will surely follow unless this fact is considered as the industry prepares for yet further cuts.

Since the majority of bonuses are not guaranteed, and are therefore normally at the discretion of employers, any inconsistencies of approach among different investment banks could help many of those claimants who try to claw back some portion of their expected bonus.

While the current market conditions definitely favour the investment banks, if any claimant could fairly argue that his or her employer has misused its discretion by refusing to pay a pro rata portion of bonus for the previous year because other investment banks have paid bonuses to former employees, the floodgates could open.

While there is probably no real legal obligation for a bonus to be paid to someone who is not employed on the payment date for that year, my advice as an expert witness has been to recommend larger redundancy pay-offs, as finding alternative employment is proving very difficult.

There are always employees who are prepared to go down the litigation route, and with bonus pools so depleted, there is bound to be an increase in legal claims. However, one factor that may deter claims is the fact that the amounts involved in this year's bonus round may simply not be worthy of the battle. The size of the bonuses paid last year made them worth fighting for, and claimants sought to argue that they had a contractual entitlement to them.

Living in the past

The problem is, investment bankers are still living in the past. Last year, bankers and brokers within investment banks had enjoyed some huge bonuses, especially in 2006/7 with some of the senior bankers in these firms earning in excess of £10m bonuses. Also, some trading teams were awarded bonuses of £12m each.

Due to the recent sub-prime woes, European investment banking in particular suffered its worst start to a year since 2003. This has continued, with a big fall in mergers and acquisitions, and debt and equity capital market activity, and poor hedge fund returns with little hope of recovery in the next one to two years.

'The days of big bonuses are over,' warned Gordon Brown recently. The prime minister said his government would use the partial nationalisation of banks to crack down on 'incentives for irresponsibility or excessive risk taking for which the rest of us have paid'.

Most banks have now begun scaling back their operations in an attempt to hold the line on costs as profits plummet. In the short term, bonuses for 2008/9 are expected to be slashed across the board (down 40-60 per cent), with some senior executives at institutions such as UBS and Goldman Sachs agreeing to forgo their annual bonus payments.

Worst-ever conditions

These are the worst market conditions I have ever seen in over 27 years of working with front-office investment banking roles and also within private equity and hedge funds. While high-calibre candidates are always in demand, most if not all investment banks are reviewing headcount and to date over 150,000 jobs have been lost worldwide.

The only type of recruitment taking place up to the current day has been for those proven and experienced revenue generators with a strong and established client franchise.

Previously, bonuses were measured by how corporate clients value an individual's worth and by actual revenue contribution, therefore bonuses were geared to those who bring in the client's business. Bonus payments were paid as roughly one-third shares and two-thirds cash, although there were certainly banks known for paying more in stocks than cash.

There will be pro rata bonus claims starting shortly after this year's bonuses are announced. And as I sit around conference tables with barristers, solicitors, valuation experts and forensic accountants preparing cases it is clear that the compensation structure for investment bankers is likely to radically change, with many banking institutions now operating on an 'eat what you kill' basis.

But try selling that to the investment bankers who have lived through the 'golden age'; to them it feels as if we are living in the last chapter of the Book of Revelation.