Bulge banks' rising profits spell rising bonuses

Analysts' forecasts suggest US investment banks are on track for a sizzling second quarter. It augurs well for bonuses.

Goldman Sachs, Lehman Brothers, Morgan Stanley and Bear Stearns are set to report earnings in the next few weeks. Consensus forecasts from Thomson Financial suggest it will be another bumper quarter.

According to Thomson's analysis, Goldman Sachs is ready to report net income up more than 100% on the second quarter of 2005, Morgan Stanley will report net income up more than 58%, Lehman will be up 178%, and Bear Stearns will be up more than 20%.

Will higher income feed into higher bonuses? Jon Terry, a compensation and benefits specialist at PriceWaterhouseCoopers, says yes.

Profits are good indication of bonus levels, says Terry. "Most bulge bracket banks aim to pay 50% of profits as bonuses," he says. "Profits are initially calculated on the basis of all costs, except bonuses. It's a fair assumption that if profits are higher, bonuses will be higher."

At Lehman Brothers, average pay last year was 168,936 ($315,000). If annual pay increases at the same pace as second quarter income, the average Lehman banker could be on 465,000 in 2006.