Year-end bonuses for investment banking groups remain on track to climb 10 - 20 percent above last year's robust levels, notwithstanding the debt crunch that hammered bottom lines and put a damper on new jumbo LBOs, a new report concludes.
Other Wall Street sectors poised for double-digit bonus growth this year include prime brokerage (15 percent), equity asset management (10 - 15 percent), high net worth (10 percent), equity derivatives (20 percent) and private equity (20 percent plus), says the report from Johnson Associates, a widely quoted compensation consultant. Even fixed-income derivatives are projected to pay out 10 percent more per employee than last year.
The sub-prime blowup and its fallout will weigh heavily on bonuses pools for "plain-vanilla" fixed-income departments, according to Johnson's "Third Quarter Trends and Year-End Projections" report, dated Nov. 1. Those groups will be paid 5 - 15 percent less per head than last year, the report predicts. Three months ago, when the credit crunch was just starting to be felt, Johnson had projected full-year bonuses for fixed-income groups would be flat with 2006.
Fixed-income contributed only 25 percent of investment banking net revenue among seven bulge-bracket banks for the year to date - a steep decline from 33 percent in the same period last year. Equity's share grew to 24 percent from 20 percent.
Johnson's latest year-end payout projections for most sectors are below what was envisioned three months ago. Average bonuses for "staff positions" are now projected to come in roughly flat (down 2 percent to up 5 percent) with 2006. In Johnson's second-quarter report, dated Aug. 9, they were seen rising 10 percent. Similarly, bonuses for senior management in various investment banks is projected to come in down 15 percent to up 5 percent from last year; the second-quarter report called for a 5 percent year-to-year increase. Bonuses for commercial and retail banking groups, including senior management at commercial banks, also are seen flat to lower versus 2006.
The figures describe the broad landscape among firms. Individual firms' payouts will vary based on their degree of exposure to troubled mortgage and credit markets, Johnson says. Strength in derivatives and international (M&A) advisory are other areas that will differentiate among firms. "Because (the) fourth-quarter outlook has changed from positive to a 'wild card,' incentive messages have been cautious as firms try to set expectations internally," the report says.
A column graph indicates company-wide bonus pools for 10 unnamed "major investment and commercial banks" range from 20 percent above 2006 for the best-performing institution, to 10 percent below 2006 for the worst-performing institution, with a median of about plus 4 percent.
Despite many downward revisions from last quarter, Johnson's latest projections on the whole are more optimistic than either the views of other forecasters or the mood in the trenches. For example, the New York State Comptroller's office recently predicted that the industry-wide bonus pool for 2007 will decline 10 percent from last year's record high $23.9 billion.
Alan Johnson, the consulting firm's managing director, says 2007 payouts will be propped up by stellar profits from the first half of the year. But now that the bond structuring and LBO financing desks that generated a big chunk of those first-half profits are largely silent, he says the industry outlook for 2008 is considerably darker.