Changing Face for I-Banking - and Comp

Investment banks will concentrate depleted 2008 bonus pools among a thin layer of top producers whose total compensation exceeded $5 million in recent years, recruiters say. Even those stars are likely to receive less than half the bonus they got last year. And bankers whose production falls in the middle of the pack should expect no bonus at all.

That's not even the worst of the news. I-bankers have learned to live with the occasional huge cyclical decline in compensation - which historically has been followed by still higher peaks when the cycle turns up again. This time, though, re-regulation and other secular changes could block bankers' bonuses from ever regaining the heights reached in 2006. As Goldman Sachs and Morgan Stanley become bank holding companies, even insiders are unsure of how compensation practices may evolve in years to come.

"In some respects, anyone in corporate finance is lucky to have a job," says a senior executive recruiter at a leading firm, who asked to speak off the record. She anticipates bonuses may be as low as 25 - 50 percent of 2007 numbers even for elite producers. For the majority of midlevel or average producers, bonuses will probably be "non-existent," she says, adding: "It's pretty grim."

"Of course, the bonus pool is just much smaller," observes Doug Rickart, division director at Robert Half Financial Services Group. "If the overall financial performance wasn't there for the firm, there isn't much to hand out in terms of bonuses."

Some Protection - for Top Performers

With smaller bonus pools to draw from, Rickart predicts bonus compensation will be skewed toward individual contributors. Although even the high producers will be seeing a decline in compensation, most firms will want to take care of their top talent. "Firms will want to retain solid individual contributors who have tenure and who have produced through good markets and bad," Rickart notes.

"There will always be demand for high producers who have transferable books that generate revenue of over $40 - 50 million," he says. This upper echelon of producers, who in recent years may have pulled in total compensation in the $5 million to $10 million range, may have some job security. Even so, their compensation will be a fraction of last year's.

Our anonymous recruiter agrees top talent will get the bulk of the compensation. "Run of the mill producers," people who generate $30 million to $50 million in revenues for firms and probably made an average of $2.5 million in 2007, will be hit hard. Those individuals may be looking at base salaries, which tend to be in the $200,000 range, and no bonuses at all. Most of the recent IB layoffs have been at the director and young managing director levels, says the recruiter, leaving many individuals at this mid-production level.

Says one mid-level investment banker, who declined to be named, "When you're used to making over a million bucks, that is a big adjustment."

Creative Compensation, Few Guarantees

In an anemic bonus environment, firms may need to get "more creative" with compensation in general, says Rickart. He mentions deferred or other forms of comp may be used to "demonstrate that a firm values its producers even in tough times." At the same time, the unnamed recruiter notes that I-banking talent being snapped up by competing firms will receive few guarantees. The exceptions are a handful of top Lehman producers going over to Barclays.

"We're hearing that the top few people are getting guarantees in the form of guaranteed bonuses," she says, adding that a portion of these bonuses will be in equity. "It wouldn't be surprising if the equity part is bigger, because right now it is easier paying equity than cash."

These guaranteed bonuses - which may only be around 10 percent of last year's bonuses, are to make up for the loss of Lehman stock. "A guaranteed bonus may sound 'frothy,'" she says, "but keep in mind these are people who lost significant equity that they'd built up over time."

MBA Programs Still Recruiting

Despite the industry upheaval, there are still opportunities for young entrants to the market, Rickart says. Most firms are still recruiting at top MBA programs and starting salaries will probably remain level.

"An MBA should probably go into investment banking with eyes wide open, as the industry will probably not have the same bonus potential as in the past," he believes. "But there are still plenty of old school I-banks, and there will be an ongoing demand for corporate finance."