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Last Updated: Tuesday, 13 December 2005, 12:01 GMT
What's the deal with City bonuses?
The Magazine answers...

Life as a trader - hectic and high-pressured
It's going to be a bumper Christmas for City bonuses, reportedly. So who gets them and how does it affect everyone else?

Expect a lot of happy faces in London's Square Mile and Canary Wharf, if reports about the size of the annual bonus round is to be believed.

Up to 3,000 bankers and brokers are expected to pocket at least 1m each. And there are reports that two Goldman Sachs bankers will be receive 10m each.

And it's not just the traders and frontline staff who benefit, because most of the 350,000 City employees get some kind of bonus.

There are two types of bonuses - discretionary and those linked to an individual's profit and loss (P&L). So the private conversation with the boss that happens at this time of year should not be too much of a shock to those who know exactly how much they've earned the company.

Overall it should be a bumper year because there's been a lot of lucrative corporate mergers and acquisitions
Stuart Fraser
Brewin Dolphin
They are usually paid before Christmas, so staff can buy their presents, although big earners do not usually receive their payments until the New Year.

So are the reports that 3,000 people will get 1m true?

"That's 1% of the City population so it could be about right," says City commentator Stuart Fraser of Brewin Dolphin. "Some will get 10, 20, 30 million pounds, but everyone generally benefits because the bonuses are spread out to staff across the industry.

"Overall it should be a bumper year because there's been a lot of lucrative corporate mergers and acquisitions."

With the cost of borrowing so cheap, companies have been taking over other companies so that's helped the flow of deals and meant more fees generated by advising companies what they should be doing and who they should be taking over, he says. That means investment bankers expect particular big bonuses.

'Bonuses fair'

The main purpose of these payouts is to attract the best staff and keep them motivated, although the size of them has fallen since the 1980s, in favour of larger salaries.

That has not prevented strong concerns about the size of them, most recently from Labour MP John McDonnell, who has labelled them "obscene".

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"You have to bear in mind they are earned by merit," says Mr Fraser. "The traders are the best. They are bright and they work all hours. It's a very free and open market and they don't pay that type of money unless they're making it.

"But the companies own you. It's a bit like being a footballer. You can stay up there for a long time or you can drop. A 10m bonus means you've made a 100m profit. There are not many people who can do that."

The feeling that this year has been a profitable one in the City has been felt in the housing market. Property website Rightmove recorded a 16.3% increase in prices in Kensington and Chelsea in the five weeks to November 12, a rise interpreted as bonus-fuelled.

Mickey Clark
Sales are often dictated at the upper end of the market by the bonus system
Mickey Clark
Wake Up to Money
Gareth Jones, who sells homes in Kensington for Knight Frank, says: "There's been more banker interest this year than the last couple of years, looking at the 3m to 10m houses. It's a clear message from the City that they're getting good bonuses this year.

"This is traditionally the time when the bonus money filters through. They're paid in February but they're often told before Christmas so they look now in order to complete then."

There are other ways the bonus effect makes its mark. For a start, the average earning figures can show a blip in January or February, distorted by the cash injection.

Top car dealers, restaurants, wine merchants and champagne sellers can also expect good business, says Mickey Clark of Radio 5Live's Wake Up to Money.

Home in Kensington
Interest in top homes has surged
"When the market collapsed in 2000, the car traders in Mayfair complained about a drop in sales to people in the City, who have company cars but like to buy an Aston Martin or a Porsche as an extra," says Mr Clark. "So sales are often dictated at the upper end of the market by the bonus system."

Clothes retailers also rub their hands in anticipation, if they're based in central London or Canary Wharf, because they get more customers, says Mr Fraser, but don't expect the high fliers to head straight for Harrods.

"Those with the big bonuses probably won't be shopping because they've got 'x' number of suits and don't need to buy another 10.

"That money will sit in the bank because they have no time to spend it. It will go on property of one description or another."


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