Bonus Outlook: They're Not Dead Yet

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Although Wall Street is awash in gloomy news, year-end bonuses could exceed rapidly darkening expectations.

Since July, a pullback of liquidity in many credit markets is putting a damper on the formerly buoyant merger and acquisitions advisory business. But fees generated by record deal volume in the first eight months of 2007 should help cushion advisory groups' payouts for the full year. Wall Street recruiter Joe Ziccardi, chief executive of Cromwell Partners, looks for M&A bonuses to match 2006, "with some vulnerability to be down 10 percent."

Meanwhile, bulge-bracket firms are still making profits from their equity businesses. That suggests equity groups will see their awards at least match last year's levels, Ziccardi says. "Assuming the market does not unravel, I would expect equities to have a moderately good year with bonuses being between flat to being up 10 percent."

However, in the hard-hit areas of fixed income and leveraged finance, Ziccardi looks for payouts to fall 30-50 percent in the U.S. and 10-30 percent in Europe.

Other Views

Alan Johnson, a widely quoted compensation consultant, continues to voice a fairly benign outlook for 2007 bonuses, even while he turns increasingly pessimistic about 2008.

Despite the heavy toll on industry-wide profits from the sub-prime mortgage blowup, Johnson sees bonus pools for many departments other than fixed-income to be on track to exceed last year. "It's not so bad to be getting paid flat to up a little bit from 2006, which was a great year," he says.

Johnson is far from bullish: Since mid-year he's been predicting that investment banks' profits, compensation and U.S. headcounts will all contract in 2008. But he says outsize profits earned in this year's first half will hold 2007 payouts at or above 2006 levels for the majority of professionals in areas like M&A, equities, prime brokerage, asset management and private equity. He also says banks expect to post better results for the fourth quarter, thanks in part to the write-offs they just took.

While acknowledging that weaker firm-wide profits or outright losses in this year's second half point to downward revisions in some sectors for the year-end ompensation outlook he issued in August, Johnson expects payouts will be slashed only for fixed-income divisions where losses were concentrated, such as mortgage trading, structured finance and leveraged lending.

Regarding Merrill Lynch's $2.24 billion third-quarter net loss and much-enlarged $8.4 billion write-down announced Oct. 24, Johnson says, "Merrill is going to be one of the (compensation) laggards, but somebody has to pull up the rear." While the magnitude of Merrill's debacle was unexpected, he says it doesn't alter the industry-wide outlook for 2007 bonuses.

Other observers are less sanguine.

"With the Street writing off billions, how can the bonus outlook be good? That's not encouraging for anybody's bonus," says Jay Gaines, chief executive of search firm Jay Gaines & Co. The Street "may get tougher on its marginal performers, both in terms of bonuses and in terms of keeping them," Gaines adds.

Hedge Funds' Payouts Seen Climbing

Beyond Wall Street, the bonus outlook appears to be holding up well. Sources tell eFC that most hedge funds are poised to boost bonus levels after bouncing back from a scary August when many funds suffered losses. George Yulis, principal at Rothstein Kass Executive Search Group, predicts hedge funds on the whole will pay their accounting and operations groups 15-20 percent more total compensation than last year. Many funds "were hedged appropriately" against last summer's credit-market turmoil and equity market correction, Yulis says.

Even funds that post mediocre returns want to hold onto their employees in order to continue offering investors a broad menu of strategies, says Sandy Gross, managing partner of Pinetum Partners, a hedge fund-focused search firm. Gross says publicly traded fund managers may have to adjust payouts and other expenses when revenue - which for funds is closely tied to returns and asset size - slows. But the majority of fund firms that are privately held can opt to ride out a bad quarter or a bad year if they anticipate better times ahead.

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