Money can't buy you loyalty

Del boy and Rodney, the stars of Only Fools and Horses, weren't the only spivs to strike it rich in 1996. The City's spivs - the traders, advisers and analysts - took home their biggest bonuses ever last year.

While they may not all have become millionaires like Del boy and Rodney, all the signs point to the fact that many of them received bonuses big enough to pay off, at least, a reasonably sized mortgage.

It is easy to explain why. Last year was the year of booming stock markets and, more importantly, a record year of activity in the mergers and acquisitions field.

All these factors bring nothing but good news for investment banks, most of which are expected to report record profits for the year. It also means that the staff who brokered the deals, bought and sold stocks and provided the analysis, all joined in the party.

"If you're any good at trading and the head of a desk you're going to be pretty frustrated if you didn't make a million dollars in 1996," says Martin Krajewski, managing director of Firth, Ross & Martin Associates, a firm of City headhunters.

Many investment banks announce their bonuses around Christmas time but the staff at those which wait until the start of the new year to reveal theirs knew to expect a bonanza. The result was a phenomenal atmosphere at City wine bars around Christmas time. Even charities have benefited. At a recent annual City bash the bidding got so wild at a charity auction that investment banks and securities houses helped to raise the largest ever single amount for Save The Children.

However, while the champagne has been flowing - the proprietor of one bar near the offices of Merrill Lynch, the US broking house, has been reported as selling out of one expensive champagne label - signs are emerging that the party could all end in tears.

Regulators, for one, are starting to get jittery about the "star" culture created at most investment banks. These "stars" - the likes of Nicola Horlick, once of Morgan Grenfell Asset Management - command huge salaries and even greater bonus potential.

They also have their employers over a barrel. Even a whiff of their intention to resign causes concern and the "star" knows it. The result is a boost to their salaries and, more importantly, their bonus. Bosses around the City now expect rumours of resignations around bonus time, as employees play the game of ensuring a huge payout.

But what is of more concern is the fact the "star" can kill a business by even the threat of leaving. Nick Durlacher, chairman of the Securities and Futures Authority, the City regulator, blames the firms for allowing themselves to be held to ransom by their high-flyers.

"To some extent management have brought it upon themselves by the willingness to put so much of the reward for strong performance on individual performance and individual bonuses. The danger is that it's replaced ... loyalty," says Mr Durlacher, himself from a long line of City professionals.

"We use the word `stars' because we borrowed it from Hollywood and one can observe from casual reading of memoirs coming out of Hollywood that the stars were difficult to manage for the studios."

No one suggests that all "stars" are likely to break the rules, commit frauds or generally run off the rails. But what many experts increasingly believe is that the onus put upon them to generate large amounts of revenue in return for their bonuses may drive them to the limits, or even over the limits.

Nick Leeson, the trader now in jail in Singapore, was expecting a pounds 500,000 bonus just hours before he broke Barings; Yasuo Hamanaka, the disgraced trader at Japan's Sumitomo, had achieved "star" status.

Even Peter Young, a former fund manager of MGAM, was a star in his field. His ability to provide excellent returns on his funds apparently failed to prompt his managers to notice that he had set up a web of Luxembourg holding companies to hide the true extent of his investments in risky securities. Peter Young is now under investigation by the Serious Fraud Office.

Mr Durlacher has been on a crusade since taking the helm at the SFA to make top management take full responsibility for their staff.

Experts warn that management should keep control of any stars who emerge. Management should question them when they are making profits, not just when their luck runs out and their positions turn to losses.

What is also important is that management creates an environment of loyalty, although experts warn this is becoming difficult because of the way in which many businesses have been built up by hiring top teams from rivals.

The teams are hired on big pay deals and promises of great bonuses but this also makes them sitting targets for the next firm which is looking to expand its business quickly.

"You don't buy their loyalty. For a while you do ... until the next big offer comes along," says Phil Rivett, chairman of Coopers & Lybrand's capital markets group.

Roger Steare, chief executive of Jonathan Wren, the headhunting firm, thinks firms may be starting to realise the pitfalls. "A very hard lesson at the end of the day is that if you try to keep people by throwing money at them it doesn't work," he says.

This has not, however, stopped the annual merry-go-round job market from starting up again now that bonuses have been revealed. Finding a solution is not easy and for professionals like Mr Durlacher who have witnessed the City's transformation in the 10 years since Big Bang, the erosion of the partnership culture is key.

Before Big Bang, loyalty was less of an issue because firms were small and staff quite often locked in on some kind of partnership deal. These days investment banks employ thousands of people and, in most cases, are run for shareholders.

There is a long-surviving partnership on Wall Street: Goldman Sachs. It rarely loses staff and while some will quickly point out that this is hardly surprising given the size of their salaries, many of the staff are paid in stock in the firm. Goldman also hardly ever engages in team hires and insiders say it nurtures staff and provides career guidance.

This contrasts with Deutsche Morgan Grenfell, which has made its name in recent years as a poacher of teams. This explains why few of its rivals have sympathy over the Nicola Horlick situation. She was suspended because MGAM believed she was in the process of taking her fund management team to ABN Amro, a rival firm.

The more cynical of City observers point out, however, that even locking employees in through partnerships may not work these days. The dog-eat- dog mentality in the City and the mad dash to expand businesses as quickly as possible means rivals are increasingly likely to buy out any built- in bonuses and share deals.

The City has seen all this before and it is inevitable that the current circus will end eventually. Another economic downturn will do the trick, as would a sudden policy change like that in 1994 when the US Federal Reserve hiked interest rates.

The arrival of the single European currency is already adding some caution in the market for foreign exchange related jobs. The problem for many investment banks is what to do with perfectly good traders whose ability to second-guess European exchange rates will no longer be needed after 1999.

Mr Steare, for one, has a plan and is just beginning to work with two investment banks to keep such staff by retraining them for other positions in the firm. He hopes this will prevent a high turnover of the workforce and instil some level of loyalty in employeesn