Wall Street will accelerate layoffs this year, shrink severance packages and retention efforts, and defer more pay. As for bonus expectations, already down 25 - 35 percent year-on-year, they'll melt further if asset write-downs exceed current projections.
Those are the words from Johnson Associates, a compensation consultant whose clients include many large financial institutions. The firm's second-quarter report spotlights the downside risk to its own projections for 2008 bonuses. It also asserts Wall Street is far from done cutting heads.
A "crescendo of layoffs is expected as firms acknowledge select business reductions may be permanent," the report says. In turn, Johnson sees cost-cutting leading to smaller severance packages and less concern about employee retention.
Bonus Forecasts by Business Segment
For most segments, year-end bonus forecasts weakened compared with the consultant's previous quarterly report, issued in May. They might weaken further as 2008 plays out: "Unanticipated write-downs could cause a compensation melt-down," the report warns. It also says firms may opt to "defer" a rising portion of pay in 2008 "and beyond."
Senior executives at investment banks are projected to take home an average of 35 - 45 percent less in incentive pay than last year. That's far worse than seen three months ago, when Johnson pegged this group's year-on-year pay decline at 20 - 30 percent. (For commercial bank top execs, Johnson continues to forecast a 25 - 35 percent decline.)
Investment bankers are the second-hardest hit group among the report's 12 segment breakouts. Their bonuses are now projected to shrink 25 - 30 percent this year, which is 5 to 10 percentage points worse than Johnson Associates estimated three months ago.
For back-office staff within both investment banks and commercial banks, year-end pay is seen down 20 - 25 percent compared with 2007. These departments cover a broad landscape, from accountants to network administrators to compliance to marketing. Risk management pros will fare relatively better than technology and operations staff, Johnson says.
The least damage to bonuses is seen in fixed-income asset management, predicted to be down just 5 percent year-over-year on average. Johnson notes assets are shifting to less risky, lower-fee products such as money market funds. Bonuses for equity asset managers are projected to shrink 15 percent, as market depreciation partially offsets increased assets under management.
Prime brokerage and high net worth professionals are each projected to earn 10 percent less than last year.
The bonus data reflects nine major investment and commercial banks and eight publicly traded asset management firms. The latter are suffering less than the former. Johnson pegs overall bonus pools among the asset management firms as 2 percent to 23 percent lower than 2007, with a median drop of 10 percent. Among the banks, overall bonus pools are projected to shrink between 15 percent and 40 percent, with the median at 30 percent.
The report also observes analysts' earnings estimates for investment and commercial banks continued to be revised lower through July. That presages a cyclical downturn extending into 2009, Johnson says.