As reported several weeks ago, investment banking bonuses in Europe are threatened with new regulations limiting investment banking salaries. The European Parliament has voted to cap investment banking bonuses at 100% of salaries while the European Commission and European Council are in favour of weaker restrictions. A final decision – involving a bonus cap of 500% or less – is due in March next year.
In this context, it’s startling to note that Fahim Imam-Sadeque, the former head of sales for the UK, Middle East and Australia at Royal Bank of Canada’s BlueBay Asset Management, reportedly received bonuses equivalent to 25 times his salary whilst at BlueBay in 2011. As reported in the Telegraph, BlueBay refused to pay Imam-Sadeque’s bonus after claiming that he attempted to solicit former colleagues for his new employer, Goldbridge Capital Partners and Imam Sadeque unsuccessfully contested this in court. Court documents show that he was paid a salary of £100k, but that bonuses and vested shares related to the IPO took his total compensation to £2.5m. BlueBay declined to comment.
Cliff Weight, a director at compensation specialists MM&K says such compensation structures are now very uncommon in investment banks. “The old days, when investment bankers were paid a salary of £150k and a bonus of £3m, are over,” says Weight. “Salaries are now £300k and you’re very lucky if bonuses are ten times that.”
Banks have not only become less profitable, says Weight, they’ve also gotten better at defining profits for the purpose of bonus calculation: “Banks won’t pay on paper profits based on mark-to-market any more. They want evidence of risk-weighted profits over a number of years.”
Sam Whitaker, a compensation specialist at law firm Shearman & Sterling, says that London banks are free to pay bonuses equivalent to any proportion of salaries, although the UK Financial Services Authority says salaries must be high enough that banks could be very flexible and pay no bonus at all if necessary. ”In theory, you can currently have a ratio of bonus to salary in investment banks that’s extremely high in some cases. But 25 times would probably be extremely unusual,” he says.
Hedge funds, however, remain outside European compensation regulations and are still free to pay as they like. Imam-Sadeque’s 2011 bonus included stock that had vested following BlueBay’s sale to RBC in 2010, but hedge fund headhunters say bonuses that far outweigh salaries remain very common in the sector.
“It’s absolutely not unusual that someone working in a hedge fund would receive a bonus equivalent to 25 times salary,” says David Durham at hedge fund search firm Durham Consultants. “This would usually indicate that someone had made a lot of money for the firm and was on a performance related compensation structure.” Money managers at hedge funds can typically command anything from 8% to 75% of their profits, Durham says.
This situation may well change in future. The European Union’s Alternative Investment Fund Managers Directive will become national law in July next year. The directive includes requirements that hedge fund bonuses must be deferred over three years, similar to investment banking bonuses for specified ‘control staff’. In the event that the EU caps banking bonuses in relation to salaries, hedge fund pay may be similarly capped in years to come.