> the pay is not bad for the east coast
Do they still insist on a mediocre base salary with completely not guaranteed annual bonus lump sum?
If you are a trader this makes perfect sense, but I've never quite understood it for programmers.
Do they still insist on a mediocre base salary with completely not guaranteed annual bonus lump sum?
If you are a trader this makes perfect sense, but I've never quite understood it for programmers.
Financial first: deferring compensation from continuous throughout the year to a lump sum at the end is essentially getting your employees to lend you money. Depending on the implied terms of the loan (ie, how much extra you have to pay your employees in order to get them to agree to defer some of their compensation), it may be a better source of funding than issuing debt or equity. That's why banks and broker/dealers like the deferred bonus compensation model.
On the regulatory side, banks and broker/dealers are required to maintain a minimum amount of capital. Guaranteed bonuses would count as liabilities, reducing capital. Discretionary bonuses, however, don't have to be counted as a liability for regulatory capital purposes, so they don't reduce your regulatory capital. (They still count as liabilities under GAAP though.) That regulation is why they like to make them discretionary.
Disclaimer: regulatory capital definitely works like this for non-bank broker/dealers. Banks are subject to different rules, with which I am less familiar, but I would guess they work the same way with respect to discretionary compensation.
Also, when the bonus comes in it is paid out in two portions - one immediately, and one six months later. This helps retention, since there is always a carrot for the employee to look forward to every six months.
[edit] Saving 10K on a programmer, even multiplied over 1000 programmers isn't going to amount to a hill of beans in a crisis where the bank is at risk. My suspicion is that tech management at banks have adopted this system because they're failed middle managers and it helps them pretend that they're BSDs with the ability to swing pnl.
To back this up, I can draw on the experiences of my friends and former colleagues across the Street, and a large number of hair-raising interviews at other banks that made me repeatedly wonder why I would trade in the devil I know for a dumpster fire.
At the end of the day though, "the best in class" is still not "good".
I guess it's better than the "unfunded pension because they don't come due for 50 years when we'll be totes making bank" approach...
Think of it this way: would you rather get a 5-6 figure bonus most years, or a 6-7 figure stock option liquidity event in 3-7 years with a 95% probably of zero and you don't find out until after the 3-7 years have passed?
Fundamentally, they serve the same purpose, to tie compensation to company performance. But banks still expect to be around 50 years from now and earn profits the whole time, startups expect to take a big gamble on growth and then cash out in a big event and sort of change form. If you're a VC the latter is a pretty good deal because you only have to pay LT capital gains tax, not ordinary income; and obviously you're able to de-risk through diversification, unlike employees.
The bonus structure in banks is there so they can set salaries to be more like a percent of the company's revenue that year, except people refuse to accept salary decreases so they have to call it something else. If you compare it to pre-IPO stock options, it seems like it could be a lot less risky from the point of view of the employee.
I have at various points in my life accepted 100% variance in pay by choosing to work freelance. It was an acceptable risk because I controlled not just the tech but also the nature of the business, and had reasonable confidence that I could make choices which would result in a satisfactory rate of return on my effort expended. Accepting employment as an engineer while also accepting the financial risk of other people's choices about how to run their business, choices you explicitly have no influence over?? That's not risk, that's an exploitation lottery.
But I would take a job with a 50% chance of making 200k and a 50% chance of making 100k over a job with a 100% chance of making 125k even if the outcome was determined by a coin flip. +EV is +EV whether I am responsible for the impact or not.
My current employer gets over this hurdle by guaranteeing your bonus for 1-2 years, thus giving them time to build trust before the variable compensation gets going.
The reason that this is done is because investment banks tend to have larger revenue swings than many other businesses. Due to this, they want to be able to more easily adjust their costs (of which people are a huge %) relatively easily. It's much easier to adjust bonuses up and down than base salaries.
If you think about what the company is saying, it's "If we fail at our business this year, we'll pay you less despite all your work." Even if that was only a 10% chance, meaning I'd statistically win, I wouldn't work there because they're looking to shit on me for their fuckups.
And it's far more likely that they'll specifically and intentionally defraud you by faking the performance metric, and reward themselves the bonus they "saved" by not paying you.
Surely this would result in extremely high turnover? High turnover employers is probably something you want to avoid anyway, so I don't see this changing the equation much.
In fact you probably shouldn't work with anyone else because whenever you do that your success is, at least in some ways, tied in with their success. Best to work alone all by yourself where you don't ever have to trust anyone else.
Quant technologists are a different beast. Like traders, they eat what they kill, and a 50/500 payout matrix may well make sense for them.