By the nature of their work, financial market professionals are always up to their necks in numbers. But recent weeks have seen certain figures grow more salient than ever, due to extreme gyrations in equity markets plus the release of third-quarter financial results. (One upon a time, the latter were called "earnings" - a word that's increasingly a misnomer when applied to Wall Street).
It won't be long before many bankers and fund managers get to see the one number they usually await with bated breath each year. It's been widely reported that 2008 year-end bonuses among investment banks are set to shrink at least 40 percent on average compared with 2007. The main reason, of course, is the seemingly endless parade of writeoffs and losses that the credit crisis is infllicting on every large sell-side institution. Adding to the trepidation is the industry's sudden reliance on government-supplied capital, which could easily lead to government influence over compensation decisions. (A bank's own government is less prone to look the other way than some government on the other side of the world ponying up capital via a sovereign wealth fund.)
We examined five major U.S.-based banks' latest quarterly releases for clues to how C-suites are managing compensation outlays so far this year. The figures we compiled shouldn't be taken as a precise indicator of bonus trends. But they might be a worthwhile starting point for analysis, for eFinancialCareers users who are so inclined.
Goldman Slashed Compensation Accruals
Our review confirms the common belief that commercial banking business can act as an anchor during troubled times. Two erstwhile pillars of the standalone investment bank model, Goldman Sachs and Morgan Stanley, show precipitous declines in year-to-date compensation accruals. Goldman's nine-month compensation expense, adjusted for workforce size, is down 38 percent to $351,000 per employee from $566,000 a year ago. Morgan Stanley's is down 17 percent, to $231,000.
Of the other institutions we looked at, Merrill Lynch reported a 2 percent increase in average compensation expense per employee for the first nine months of 2008, to $183,420. Among commercial / investment banking institutions, Citigroup reported a 9 percent increase, while JPMorgan Chase reported a 1 percent decrease. We didn't attempt to disentangle either firm's investment bank compensation from its retail banking segment. We did remove Washington Mutual's 42,000 employees from the JPMorgan reported headcount, but did not try to adjust for the impact of JPMorgan's acquisition of Bear Stearns.
A sixth institution, Bank of America, accrued 17 percent less compensation expense per employee for this year's first nine months compared with last year. However, B of A's headcount soared 25 percent this year, largely due to its acquisition of Countrywide. That merger could be responsible for the drop in average compensation as well, by altering the composition of B of A's workforce.
Official Employment Data: Too Good to Be True?
Bulge-bracket banks, of course, make up just one segment of the financial industry. A range of other institutions, from boutique investment banks to mutual fund firms, largely avoided the severe balance-sheet damage that's hobbling the banking sector's marquee names. Opportunistic hiring among buy-side shops and niche sell-side shops may explain why, even as investment banks' cumulative layoff announcements surpass the 100,000 mark, securities industry employment in the U.S. ended September little changed from a year earlier, according to the Department of Labor. Even in New York City, the epicenter of the worldwide banking implosion, employment within "securities, commodity contracts, and other financial investments and related activities" has declined by just 10,000 jobs (5.2 percent) since peaking in August 2007.
We continue to believe the worst is yet to come on the jobs front. The industry's last previous cyclical downturn,from 2001-2003, saw New York securities employment shrink 20 percent from its peak. If the same ratio holds this time, then another 30,000 jobs are fated to disappear within a year or so - over and above the number of new slots that happen to spring up. The latest projections from the Office of New York City Comptroller William Thompson align with our figure, estimating that the city will lose an additional 35,000 financial market jobs in the next two years. And across the Atlantic, London's financial center is on track to lose 28,000 jobs this year and 34,000 in 2009, according to a recent report by the Centre for Economics and Business Research, a UK think tank.