Bonus Damage: It's Not Just Fixed-Income

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As one of Wall Street's primary casualties of the sub-prime meltdown, Merrill Lynch is being spotlighted as an early read on the breadth and depth of damage to year-end bonuses.

While recent media reports of a 40 percent average year-over-year bonus reduction for fixed-income are no surprise, one news outlet says that Merrill's investment bankers, equity traders and even private bankers will be paid less than last year on average. The last area in particular is one where major banks continue to rev up investment, as clients, assets and profits continue to swell without entangling banks' capital in risky financial assets.

"In the investment banking and equities areas, bonuses will be flat to 10 percent lower, while private client support will be down 5 to 10 percent," CNBC's Charlie Gasparino reported Friday. John Thain, Merrill's new chief executive, wants all departments to share the pain, according to CNBC. "Sources say the move has drawn deep resentment in the company, possibly leading to lawsuits," the network added.

Merrill employees will officially learn their bonus amounts early in the New Year, according to Bloomberg News. The figures making the rounds this week were derived from bonus pool totals reportedly sent to Merrill managers for divvying up among team members.

If True, Will It Backfire?

Recruiters interviewed by eFC offered mixed opinions about the likelihood and the wisdom of management - at Merrill or anywhere - opting to cut most employees' bonuses below year-earlier levels within profitable business units that they expect to keep growing for both the near-term and the long-term.

"I don't think banks want to hurt the performing areas of their business," says Steve Yendell, managing consultant at Selby Jennings in London. Even allowing for inevitable reshuffling of profits to support bonuses for selected individuals in loss-making departments, Yendell still expects most employees in strongly performing departments to get bigger payouts than last year - just not as big as they would have been if the credit crisis hadn't occurred. "Instead of 10 (percent) up, they might be 5 up," he says.

Jay Gaines, chief executive of New York search firm Jay Gaines & Co. takes an opposite view, shaped in part by his conviction that Wall Street's long-dominant "get it while you can" compensation model needs to be torn out at the roots.

"It would be a travesty if parts of Merrill paid their people well while the firm took these enormous losses," Gaines told eFC. Instead, he looks for Wall Street's new leaders, such as Thain and Citigroup's Vikram Pandit, to overhaul compensation formulas, "so that people aren't encouraged to take their firm over the cliff."

When asked whether even a financially troubled institution can afford to alienate its own investment banking or private wealth management teams, Gaines opines that most employees who generate "consistent dollars and are part of the fabric of the firm" understand the broad impact of the credit crunch, and consequently will accept a reduced bonus without bolting.

"These people make a lot of money. And no one said it's all good years," Gaines says. Naming four bulge-bracket shops that have yet to release fourth-quarter results, he says, "These earnings are going to be off considerably from previous years, and it's got to affect how anybody gets compensated." He also says Wall Street's most "mercenary" employees will eventually jump to hedge funds even if banks pay up to hold onto them now.

Yendell of Selby Jennings agrees it shouldn't be assumed that every bank employee whose payout is smaller than 2006 will try to bolt, or will succeed.

Unofficial Bonus Decomposition

Expanding on CNBC's story, Bloomberg News reported that Merrill "told fixed-income managers to cut 2007 bonuses by an average of 40 percent, according to two people briefed on the matter. Payments may fall by as much as 80 percent for traders who specialize in the mortgage bonds and collateralized debt obligations that posted the steepest losses." Interest-rate traders may see their bonuses decline 20 percent on average, while corporate bond traders may be paid 60 percent less than 2006, Bloomberg said, citing unnamed sources inside Merrill.

But Bloomberg did not repeat CNBC's assertion of bonus reductions for Merrill Lynch investment bankers, equity traders and private bankers. Bloomberg's story did say that "Even stock traders and investment bankers who generated profit gains this year may get little or no bonus increases," and that the payouts may contain a higher proportion of stock this year.

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