It is time to discuss the bonus structure that firms are offering. This is a continuation from last week where we discussed the differences between bulge brackets and regionals. I did not want to convey that bulge brackets have only one type of bonus structure that they offer, or on the converse, that regionals offer only one type of bonus plan. There are three global type bonus calculations, and we will address the major three types: fixed bonus, “black box” or discretionary, and formulaic.
Fixed Bonus Structure
The first structure is the simplest – the fixed fee bonus. This can be applied to both public finance professionals as well as bond counsels. When a person moves to a new firm, the fixed fee bonus structure becomes a tool that will help a candidate be more comfortable when contemplating a move. First, for the non-originators, a fixed fee is the norm. This can be in the form of a signing bonus or a guaranteed minimum bonus for at least the first year and sometimes a second year if the firm really wants the candidate. The fixed fee is exactly that. It is a sum-certain dollar amount that the firm owes you regardless of your production or the team that you are assigned to with the one caveat you must still be employed there at the end of the year (or language like the above). For producers, the key word with the fixed fee is that it is a minimum not a maximum. This gives the new employee an incentive to earn more while providing them the ramp up time needed without the day-to-day stress of worrying about their income. Historically, it takes between 18 to 24 months for a mature banker to move their business and exceed their previous earnings.
Black Box AKA Discretionary Bonus Structure
The second structure is playfully known as the black box formula, or better known as a discretionary bonus. The firm will determine what your bonus is based on numerous factors. The problem with the black box model is that you have little, if any, control over what you are going to earn each and every year. The biggest complaint that has been shared with me over the years is, “I had a killer year but the firm or […] did not,” so your bonus is being affected by that news. Another complaint I have heard is that you have had a great year, but the firm subtracts arbitrary expenses that you may not have caused, and your bonus is adjusted accordingly, usually downward, regrettably. The biggest issue with the discretionary bonus structure is that you have no idea what you are going to earn over and beyond your salary.
Formulaic Bonus Structure
The last type is a formulaic, my preferred bonus structure. With a formulaic structure you know to the penny what your bonus is. The only variable is what expenses the firm subtracts out for you to get your net. Different firms have different formulas, but a new employee will have the formula as part of the offering document. There should be no surprises at the end of the year. Most firms will deduct expenses such as management fees and selling credits to net out the bonus for the banker. Most firms will also not pay a bonus unless the salary is covered, which is always netted out. Some firms, not many, are requiring up to two times base salary to be earned before a bonus is paid; however, the norm is covering your salary once and then bonus is earned.
For a new hire the best combination is a guaranteed minimum bonus for the first two years (relieving the day-to-day concern of earnings), and then a formulaic bonus structure going forward. Remember, there are many variations of the above three structures. We will be delighted to help you create the right earning model for you.
If you would like to discuss your options, please reach out for a confidential conversation at 760-477-1284 or email at email@example.com. He can also be reached on LinkedIn. Subscribe to our monthly newsletter here, which is a compilation of our weekly blogs, so you never miss one. You can find our listing in the “supplier and services” section of the Red Book under the title of “executive recruiting”.
About Harlan Friedman, JD & Founding Member, H. Friedman Search LLC. Harlan is a thirty-year veteran Public Finance Banker turned recruiter who specializes in the placement of all levels Public Finance Bankers, Healthcare Bankers, Municipal Advisors, Compliance Officers, Issuers, and Bond Counsels.