Bonuses meet the big squeeze

While Wall Street employees wonder how the up-then-down year will play at bonus time, firms are just as worried-about how to keep employees happy when revenue is flat or falling and poachers push up pay levels.

Human resources execs from a broad swathe of 90 U.S. financial services firms sounded off in a recent Securities Industry Association (SIA) survey on 2005 salaries and bonuses that offered an overall cool take-home forecast.

Staring down a talent drain

Firms may have exacerbated the crunch by being overcautious about hiring when business turned up at the beginning of 2004.

Marc Baranski, senior vice president and head of the financial services practice at HR. consultancy Sibson Consulting, says 2004 sees banks light on the ground: 'They didn't hire ahead of demand like in the late 1990s, and because they haven't hired a surplus of talent, they are now experiencing more pressure on their high performers because they don't have a huge bench behind them.'

An investment bank HR exec writes in the SIA survey, 'One of the most significant challenges we face both as a firm and within the securities industry is renewed competition, given the last few years of both hiring and salary freezes. As hiring activity increases, our firm as well as others are facing serious compression problems.'

'Retention is a key issue,' echoes another. 'With an improved business outlook and often fierce competition for recruiting top performers, compensation obviously helps to retain top performers. Being able to monitor these situations and determine how best to reward high performers is likely to be a major issue in the 2005 compensation season.'

For a select few revenue generators, a move now, or putting out the word that it's a possibility, can earn a pay raise if only because at this time of year pay and retention rank at the top of most bank HR agendas.

Stalled compensation?

Balancing employee compensation expectations against firm profitability is a moving target, however. While existing talent expects to be paid handsomely to stay on, many firms are struggling to manage those expectations against a profits fall-off in the latter half of the year.

It's been a turbulent time for investment banks as shown by mixed third quarter results of Bear Stearns, Goldman Sachs, Morgan Stanley and Lehman Brothers. In equities, poor market conditions brought revenues down by two percent from the previous quarter at Bear Stearns, 21% at Morgan Stanley, 16% at Goldman Sachs and 39% at Lehman Brothers.

Baranski says, 'The optimism of the first half of the year has not really shown up in the numbers for the second half of the year, and I think [firms] are now erring on the side of conservative estimates of performance.'

Indeed, the SIA survey found 31.5% of firms still uncertain about the size of the bonus pool. Another 31.5% of banks expected bonuses for this year to be the same as 2003. Only 20% expected them to be slightly-that's right, just slightly-higher.

Employees shouldn't expect much movement in base salaries either. The SIA survey found that the average salary increase for executives will be around 3%, while other exempt employees should expect a 3.9% boost.

Paymaster's biggest nightmare

In the SIA survey, HR execs revealed their white-knuckled worries surrounding compensation this year:

• 'Paying employees competitive salaries to retain them but being faced with pressure to control expense.'
• 'Staying competitive with the market when it can be so turbulent. Based on how the market is doing, it can provide leverage to an employee to negotiate higher salaries.'
• 'The rising cost of employee benefits as well as the instability of the bonus pool in relation to revenue.'
• 'Staying competitive with larger firms and keeping as much pay as possible a variable cost.'
• 'Retention/pay issues. Employees perceive pay is below market.'
• 'The practice of paying high upfront bonuses makes retaining and recruiting top performers challenging.'
• 'Continuing to motivate through incentive pay despite shrinking margins.'
• 'Employees are never satisfied; it's never enough.'
• 'Staying ahead of our competition in our benefit and salary offerings in order to retain our employee pool as well as attract top talent.'
• 'Balancing compensation and benefit allocations between high growth areas vs. low growth areas or declining areas. Also, retraining and redeploying employees between those high-growth and low-growth areas.'

Which all goes to say, if you're worried about what you'll be paid come bonus time or in contract renegotiations, your firm is likely worried about both what- and how- to pay you.

For additional information:

https://www.sia.com

https://www.sibson.com

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