Bigger bonuses on the cards
A new study projects 2006 bonuses will be up by an average of 15% across all business areas in the financial markets.
The study, by pay consultant Johnson Associates in New York, points to the investment banking incentive pool rising 25% on average over 2005. Johnson also flags bigger bonuses in equities and prop trading (20%-25%), prime brokerage (15%), and alternative investments (15%).
No sector shows bonuses in flat or negative territory.
Forecast increases for investment bankers are based on increased global business activity, higher market valuations, and a rise in announced deals expected to close by year's end according to the survey. The predicted rises follow bumper payouts this year, in which M&A bonuses, for example, were as much as 40% higher than those paid for 2004.
A big M&A payday pitfall could come, however, from that one little word, 'announced'. According to Financial News, nearly €100bn (67bn) in European deals could fail to come off because of cross-border protectionism. In the US, one analyst has cut his Q3 estimates on Goldman Sachs, citing a 2% fall in the bank's M&A deal closures from Q2.
Fewer deals closed mean fewer fees and a weaker performance-related bonus pool.
By contrast, KPMG in its Global M&A Predictor suggests activity could surge into 2007, past levels last seen in 2000, before hitting a plateau. Using stats from data provider Dealogic, KPMG predicts strategic and 'intelligent' deals can still be struck in the current climate of deal fatigue because both corporate balance sheets and the debt markets look strong.
The bad news for anyone in poorly performing businesses is that Johnson says banks are becoming less willing to subsidise slack areas solely as a means to retain staff. Despite reports of multiple jobs for each candidate, he says banks don't see the talent pool as limited.
| Projected 2006 Wall Street Incentive Funding | ||
| Business/Area | % from
2005 | Explanation |
| Senior Firm Management | +15% | Variations depending on business mix and performance |
| Staff Positions | +15% | Staff incentives move in line with entire firm. Impacted by growth in alternative investments. |
| Investment Banking | +25% | Reflects increased global business activity, higher market valuations, and rise in announced deals (expected to close later in year) |
| Equities (excl Prime Brokerage) | +20%-25% | Increase in volumes, higher valuations, and international activity offset spreads and pricing competition. Proprietary trading adds significant leverage and widens market results |
| Prime Brokerage | +15% | Growth tied to hedge fund transaction/lending activities |
| Asset Management | Net inflows into Equity and Hedge Fund products with ETF's experiencing high asset growth. Despite rising interest rates Fixed Income net inflows due to equity uncertainty | |
| Equities | +10% | |
| Fixed Inc | +15% | |
| Hedge Funds/ Alternatives | +10%-15% | |
| Private Client | Fee-Based: market uncertainty impacts net inflows Transaction-Based: weaker volumes as market volatility contributes to investor hesitation | |
| Fee-Based | +10% | |
| Trans-Based | + 5% | |
| Fixed Income | +10%-15% | Continued strong performance. Commodities highlight number of growing areas. Proprietary trading key factor |
| Commercial Banking | +5%-10% | Increased loan activity a result of continuing investment cycle and lower credit spreads. Offset by margin compression (flat yield curve) and expected moderate increase in credit provisions |
| Retail Banking | +5%-10% | Higher deposits/lending offset tighter loan margins. Growth in online savings accounts. Weakening mortgage banking. However, limited credit losses |
Source: Johnson Asssociates Inc
