In terms of 2007 bonuses, pain from the credit crunch will be concentrated primarily in fixed-income, according to the annual "Global Financial Market Overview and Compensation Report" released Friday by Options Group, a global executive search and strategic consulting firm. Its conclusions broadly align with the year-end compensation outlook issued earlier this month by Johnson Associates.
"Mortgage and credit-related professionals are set to receive as much as a 50 percent drop in bonuses, and most U.S. and European fixed income desks could be down 30 percent or more due to the credit crunch," the firm says. "Fixed income desks will see a 15 - 20 percent drop in bonuses this year on average."
Because fixed-income generated the bulk of Wall Street's profits in recent years, the average company-wide bonus pool at top-tier banks will be 5 - 10 percent smaller than last year, and 10 - 15 percent smaller for groups based within the Americas, Options Group says. "When fixed-income is down, they all struggle," Eric Moskowitz, who heads the group's compensation consulting practice, tells us.
Looking beyond the front-office, information technology bonuses look to decline 5 percent on average this year and decline further next year, according to Moskowitz. He also expects IT headcounts will be reduced 5 - 10 percent in 2008.
On the other hand, risk management is "super-hot right now. We see a lot of demand from both hedge funds and sell-side firms." Moskowitz says banks are snatching risk managers away from rivals by offering packages 20 - 30 percent above a candidate's current compensation.
Highlights of the Compensation Report
- For top financial services talent generally, premiums to switch employers are narrowing to a 15 - 20 percent range, down from 30 - 40 in early 2007.
- Bonus reductions, especially at banks hardest hit by the credit crunch, will prompt a number of top sales people, traders and prime brokers to enter the job market.
- Payouts for investment bankers will climb 10 percent from last year's levels, sparked by a record year for M&A plus robust new-issue underwriting business in Europe and Asia.
- "Equity cash and equity derivatives salespersons, traders and structurers are set to earn 10 to 15 percent more on average in bonuses than they did in 2006." Moskowitz says banks need strong results from equities and investment banking to make their profit targets next year. So they must do what it takes to avoid defections in these areas.
- Bonuses will swell 15 - 20 percent for commodity sales and trading, thanks to rapid growth in global demand for all kinds of commodity products.
Other Predictions From Options Group
- Emerging markets such as Dubai, Shanghai, Moscow, Toronto and Sao Paulo "will soon be considered the most important priority for global investment banks as they seek to offset declining domestic profits.... Professionals born in these countries ('ex-pats') are increasingly heading back home to take advantage of this multi-year trend."
- The U.S. dollar's broad weakness makes it ever more costly for U.S. banks to pay competitive bonus amounts to their professionals based in Europe, Asia and even Canada. But it's necessary to do so, because profits are growing rapidly in non-U.S. markets.
- Any move to cap cash compensation as UBS has done could backfire unless banks "raise the stock component significantly" - in effect, discounting their own shares in recognition that top performers (and everyone else) would prefer to be paid in cash.
- Lower fixed income bonuses, especially at banks hardest hit by the credit crunch, "will push a lot of top salespeople and traders into the job market in early 2008."