With the financial year end near, many bankers’ thoughts will be turning toward their expected bonus payouts next year, but many will be disappointed, unlike their erstwhile colleagues of a few years ago.

However, this may not be the case for those bankers whose bonuses have dramatically gone up during the coronavirus pandemic, as the crisis forced a wave of takeovers and mergers. Those involved in advising on these transactions can look forward to massive bonus payouts from the fees collected this year, but others will not be so lucky.

There was a joke among high-end car dealers in London that they knew if the annual bonuses were very good or average by the number of new Ferraris, Porsches, and Lamborghini cars bought. For those in Wall Street or in London involved in the pandemic crisis investment mergers and takeovers, such happy car-hunting days are on the horizon.

Alas for the current generation of bankers worldwide, bonuses have been shrinking for a number of reasons since the 2008/2009 financial crisis and are likely to be squeezed further. Bankers in the Gulf have, with a few exceptions at the most senior level, not been exposed to the more exorbitant bank bonus payouts of their international colleagues.

The shrinkage in bonus payouts has been led by a crackdown in regulation, with many bonus payments being deferred, paid in shares, and subject to stringent claw-back terms.

In the EU, bank bonuses have been capped since 2014 by being restricted to 100 percent of salary, or double that if prior approval from shareholders has been obtained, albeit often reluctantly and with a lot of oversight questioning. Smaller boutique investment banks are not covered by these rules and have regularly paid out large bonuses in good years.

Cost-cutting measures are another factor for a reduction in large bonus payments, although different bank segments pay out different bonuses, with investment bankers, the so-called Masters of the Universe, traditionally getting the lion’s share of bonuses.

Retail bank branch staff are traditionally the lowest paid, but some elements of the bonus culture did also spread to the retail sector where an unintended consequence of payment of commissions resulted in some mis-selling of personal financial products, such as the UK’s infamous PPP or payment protection plan insurance, costing British banks millions in compensation payouts.

Public anger and blame on bankers for the global financial crisis and the link to exorbitant bonuses for ill-judged investments has been an important brake on the previous excessive bonus culture.

But giving out large bonuses was also something that predated the 2007/2008 financial crisis, as many of the global household investment banking firms started life as partnerships, and only relinquished their partnership status in the 1990s, with the last being Goldman Sachs.

Deregulation of the financial sector, such as the UK’s Big Bang reforms of 1986, allowed the US investment firms to set up in London and make large bonus payments. This is not to say that partnerships allowed a free-for-all in bonus payments, for as long as investment banks were private partnerships, the partners bore personal liability, which concentrated partners’ minds on managing risks and reducing costs.

However, deregulation and competitive pressure meant that some banks were being paid excessively in cash bonuses to take what turned out to be increasingly short-term risks, that threatened not only their own banks but the entire financial system until government bailouts saved some that were deemed too big to fail.

Some analyzed the phenomena of bonus payment and felt that it was not driven merely by money but had a large element of an addictive status game, with super-large bonuses marking one’s status in an organization, and management was also to blame in investment banking as money was used as an important management tool. Colleagues compare bonuses leading not only to bonus envy, but also to the question as to whether they were a signal of how valued a person was to an organization.

Has the greed culture disappeared, or has it gone underground, driven more by regulators and the competitive and cost-conscious banking environment of today? Would more modest bank pay, less weighted to revenue incentives, produce more ethical banking, but result in fewer high-flying talented bankers?

Some may lament this loss of talent, but others might argue that the lost talent can be utilized elsewhere.

In the meantime, banks will try to differentiate between their remaining talents to ensure rivals do not poach them. This can be done by focusing on bankers who have done well in areas of importance to their banks, whether frontline or backroom operations, who will be rewarded and nurtured, while bankers who have not, will not.

Technology has also affected investment banking today, with many of the large clients’ trading automatically allowing investors to bypass many banking services such as investment advice, adding to the bonus misery of bankers.

• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics at King Fahd University of Petroleum and Minerals, in Dhahran.