An Early Look At 2008 Bonuses

If you think Wall Street was stingy at bonus time last year, brace yourself: 2008 is on track to be far worse, according to a top compensation consultant's latest soundings of its blue-chip client base.

Johnson Associates is projecting smaller departmental bonus pools this year across each of the 12 business areas examined in its first-quarter compensation trends report. Company wide average bonuses are seen shrinking between 15 percent and 35 percent compared with 2007 among nine major investment and commercial banks.

Amid a witches' brew of economic downturn and ongoing credit crisis, business results are declining "across sectors and products," says the Johnson report, dated May 2 but released to the media Tuesday. With profits declining so broadly, Johnson sees limited opportunity for cross-departmental "subsidies" that cushioned payouts for departments that had weak results last year.

Back-Office Pay Seen Down 15 - 25 Percent

The steepest pay drops are projected for senior managements at commercial banks. It's on track to shrink 25 percent to 35 percent from last year. Investment banks' C-suite occupants fare little better: down 20 percent to 30 percent on average, according to Johnson, which cites public outrage as a significant albeit "unquantifiable" factor. "Increasing public scrutiny (is) causing firms to discuss potential new executive and senior management pay paradigm," the report states. "Incentives funded on risk adjusted capital and clawbacks are two concepts being explored."

However, back-office pay looks to fall sharply, too. Johnson projects average bonus declines of 20 percent to 25 percent for "staff positions" at commercial banks, and 15 percent to 20 percent at investment banks. These departments cover a broad landscape, from accountants to network administrators to marketing writers. The report does mention that risk management pros will fare relatively better than technology and operations staff.

Among front-office departments, Johnson sees bonuses averaging 5 percent below 2007 even for the best-performing business lines, including prime brokerage and high net worth. These are areas where other analysts say banks' business continues to grow. Bonuses for fixed-income asset management departments also are seen falling 5 percent.

Investment bankers' compensation is projected to fall 15 percent to 25 percent on average, with advisory business stronger than underwriting so far in 2008, according to Johnson.

Proprietary trading in equities, which helped cushion profits and firm-wide bonuses in 2007, is showing weakness. Bonuses for cash equities traders are seen falling 15 percent on average. Equity asset management, hedge fund and private equity bonuses (excluding carry) are projected to shrink 10 percent. Compensation in commercial banking also is seen down 10 percent, while retail banking is forecast to fall 15 percent.

Narrowing Premium For Bulge Brackets Versus Boutiques

Among Johnson's other observations:

- Decision-makers are under "less pressure to compensate well" because this year's weak start is holding down expectations - a direct contrast with 2007, which started off gangbusters.

- Compensation differences between bulge bracket banks and "broader comparators" - an apparent reference to boutique banks and buy-side institutions - are poised to narrow as the major firms suffer relatively bigger declines.

- Among seven publicly traded asset management firms, Johnson's 2008 bonus projections range from flat with last year, to down 15 percent. That's much better than banks, where he sees nine companies' average bonuses shrinking between 15 percent and 35 percent.

- Expectations for a profit recovery are receding into 2009, as shown by an unbroken downtrend in analysts' earnings estimates for both investment banks and publicly traded asset management firms. Even in April, analysts were still lowering 2008 aggregate EPS estimates for the major banks and publicly traded asset managers that Johnson follows.