Bonuses to rise in 2003

Bonuses of front-office investment banking staff in Europe will increase by an average of 10% to 20% this year, according to a survey by Armstrong International, the headhunter.

The rise follows a drop of about 30% in 2002 and is linked to improving business conditions in almost all areas. Zero bonuses at bulge bracket banks are a thing of the past, the report said.

Interest rate traders will be among the best paid staff this year with some managing directors in line for bonuses of more than $5m (€4.35m), the report said. Armstrong surveyed corporate finance, fixed income and equities divisions in 11 leading banks.

Equity derivatives specialists will also do well, with some mid-level staff winning 100% bonus increases. Vice presidents would earn bonuses of $200,000-$500,000. Senior staff could expect lower increases of up to 20%.

However bonuses for some equity sales teams will fall 10%, though traders will be up 10% to 15%. Aidan Kennedy, a partner at Armstrong, said: 'Some banks have set up a hedge-fund type payment scheme for proprietary equity traders, to stop hedge funds poaching them.'

The survey said senior equity salesmen and traders could earn bonuses of up to $1m this year. The same figure was given by another survey by Alexander Mann, a rival headhunter. Alexander Mann, which said it spoke to 20 institutions of all sizes, also said there would be an increase in zero or low bonuses among poor performers.

Armstrong said top equity analysts can expect lower bonuses, with only a few reaching $1m, but average analysts will receive rises of 10%-20%.

Corporate finance bonuses will be flat to 15% up, with some originators however receiving lower bonuses than last time. Kennedy said vice presidents and associates would receive the highest rises, as they had been stretched by the increasing workload of the last two quarters and were demotivated by low payouts last time.

He said some banks were likely to get rid of managing directors to make way for a glut of directors waiting for promotion.

Debt capital markets bonuses were harder to gague, though most originators would be up 20%-40% from last year, the report said. Hiring for German business was likely next year due to an expected increase in activity.

Credit derivatives revenues rose slightly this year and most banks have been hiring experienced staff, especially in execution at the junior end. Asia is an increasing focus, especially among French banks. However Kennedy said expectations of some staff that bonuses would rise 30%-50% were likely to be disappointed; 20% was more likely as profits were under pressure.

Leveraged bonuses were likely to rise about 20% for successful teams, with mid-level staff doing best. Top directors would be in line for $1m payments.

Kennedy said big headcount reductions across investment banking are over; however recruitment in 2004 will be modest. Hiring bright spots will include credit, interest rate and equity derivatives roles, the report said. There would be some increase in execution roles in investment banking.

Staff were increasingly disenchanted with the equity component of their pay because of increased vesting periods and tighter conditions. However the stock element would increase this year for many, to as high as 30% for vice presidents.

Compensation ratios had remained steady or continued to be reduced. Goldman Sachs maintained a ration of 50% of revenues, while Merrill Lynch's fell from 51.7% in the fist nine months of 2002 to 49.7% in the same period this year.

The banks surveyed were Barclays Capital, BNP Paribas, Citigroup, CSFB, Deutsche Bank, JP Morgan, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Staley and Société Générale.