Are Bonuses Paid for Past or Future Performance?

Dominic Connor, a self-described "pimp for quants," explains why even if your group was unaffected by the summer turmoil, your bonus might not be as big as you expected:

The process for bonus varies, and is opaque even if like me you are a student of the topic with input from multiple sources.

The official P&D model for this bonus season divides the world into three types.

1: People who seem themselves as lucky to have a job. Their bonus will not be great. Credit is the obvious example, but other parts like sales and prime brokerage, seem to be hit.

2: People in risk, IT, HR, product control etc whose bonus is some function of the health of the company and some random noise from their manager.

3: the third type divides into two. Type 3 people work in business areas unaffected by the shit this summer. FX and Commodities for instance or prop trading units whose strategies happened to prosper in these conditions. Type 3A people will get a much greater bonus if they have done well, but... A lot of people will be type 3B, in that they work for business units without the political power to stop their bonus pool being used to prop up the bonus pools of more politically adept units. This is consistent with a reasonable view, in that to pay those who are perceived to have longer term value for the bank, you have to raid the BPs of more currently successful units. This may appear to be a rational, if unfair process, but recall that power in the bank in underwritten by earnings, so there is inherently a lag. A useful part of economics is agency which attempts to model how managers make decisions about their firm to maximise personal utility. We should thus ask who is making these decisions, and what their agenda may be.

For the past, when Credit was on the rise, bonuses were held down to subsidise fixed income, or even cash equity traders. Now that we are in a world where Credit has been successful, they will defend their patch against (say) commodities.

Thus we are going to see egregious mispricing in the market, a condition that will persist for some time due the lower ability of firms to exploit the arbitrage in this part of the labour markets.

We've already started talking to people who see themselves as 3Bs. Happy is not the right word.

So basically, if your firm doesn't see you as the future of the company, even if you've performed well recently, your bonus won't be as big as you think you deserve.