Lean 2004 bonuses mean leaner firms in 2005

Hold onto your pay stubs: the infrastructure and personnel cost-cutting tourniquet is cinching tighter around Wall Street.

While operating costs are being nosed up by regulatory action such as Sarbanes-Oxley compliance, Frank Fernandez, chief economist at the Securities Industry Association, says revenues are also under heavier fire: 'Many of our products are on razor thin margins, and they're going to get tighter and tighter,' Fernandez says. 'All we can do at this point is to continue to cut costs.'

The bottom line: stock vs. cash at bonus time

What does this mean for you?

'Bonus growth has already slowed dramatically,' says the SIA's Fernandez. 'But this year we'll still have growth.' Assuming firms continue to control costs, fourth quarter profits (and accruals to bonus pools) will be better than Q3, but not hugely so.

As a result, you're likely to see more restricted stock and less liquid cash at bonus time.

'I know of some banks that paid 50% of the bonus in stock in lean years,' says Marc Baranski, senior vice president and head of the global financial services practice at compensation specialist Sibson Consulting.

And things could worsen in 2005, says Michael Flood, managing partner of the financial search firm Westwood Partners. 'This will be a year where you'll see fairly aggressive pruning at the bottom. These firms are continually wrestling with a depressed commission environment. They're going to have to continue to weed out across function, with very few exceptions, people not adding to the bottom line. These firms are going to get smaller and smarter.'

Worth noting, says Flood, is the following 'human capital' equation: Three people lopped off from the bottom 25% equals one new hire in the top 10%.

Wall Street's growing hunger for top producers means the stratification between haves and have-nots will only expand. You only need to look at this year's expected bonus numbers to get the picture.

'Although bonus pools generally will be up 10% this year over 2003, there will be large disparities, with top performers getting as much as 40 to 50% more than last year, and some firms doing far better than others,' says Sibson's Baranski.

So which firms are finding a happy medium between cost-cutting and clear-cutting? Observers say Goldman Sachs, Lehman Brothers, UBS and Morgan Stanley have it mostly right. JP Morgan and Bear Stearns are said to have lost their way, with Credit Suisse First Boston and Merrill Lynch boxing shadows in an effort to regain their footing.

Safe harbor from overseas?

Apparently, the only thing propping up comp right now (besides the obvious allure of hedge funds) is the influence of foreign banks on the job market.

'Foreign banks always create an artificial market,' says Flood. 'HSBC comes to mind immediately as spending a fair amount of money in the U.S., and that will inflate the market for compensation.'

'There are build-outs by some of the foreign firms that are using this time of year as an opportunity to upgrade some of their coverage areas, such as financial institutions and natural resources,' says another recruiter, naming HSBC and Barclays. 'They are very up and coming firms that have been very vocal and they're using this as the opportunity to pick up the best talent.'

Of course, foreign firms have always battled against a here-today-gone-tomorrow bias, but even that concern may matter a little less to job-seekers tired of working under the hammer.