Bailout Funds Stanch Bonus Damage

Bailouts and mergers helped place a floor under Wall Street bonus payments, limiting the damage to a smaller-than-expected 20 percent - 35 percent decline this year compared with 2007.

That's one potentially explosive conclusion of Johnson Associates' latest quarterly forecast for incentive awards in investment banking, commercial banking, asset management and related specialties. The firm is one of Wall Street's best-known compensation consultants.

"When the government props up a failing firm, the firm now gets healthier and is closer to meeting the market in terms of compensation," Alan Johnson, managing director of Johnson Associates, told eFinancialCareers News. If a firm was failing and wasn't bailed out, he added, that firm wouldn't be able to pay its staff. Even if it survived, it would lose people and would be in a weaker position going forward.

In a press release summarizing the report Thursday, Johnson said, "It was a miserable year for the industry and those professionals who were fortunate enough to keep their jobs will see the fallout when they get their year-end bonuses. However, thanks in part to the financial bailouts and mergers we've seen recently, the decline in incentive payments won't be as drastic as first thought."

That follows similar remarks in an Oct. 27 Time magazine story from both Johnson and equity analyst Brad Hintz, a former Lehman Brothers CFO who now covers the industry for Sanford C. Bernstein. It could strengthen already widespread public perceptions that money from taxpayers is being used to support bankers' bonuses instead of lent out to support the stumbling economy.

Until now, Johnson and other experts had projected that 2008 year-end bonuses for financial market pros would shrink by an average of 40 percent or more.

Sector-By-Sector Bonus Breakdown

To be sure, some types of finance professionals will fare worse than others. Senior corporate executives - called "proxy management professionals" in Johnson's report - stand to make 60 percent - 70 percent less this year than last, on average. Fixed income pros are seen making 40 percent - 45 percent less (on top of a steep decline last year), and investment bankers' bonuses are projected to shrink 35 percent - 45 percent. Professionals working in hedge fund and private equity units of Wall Street and major asset management firms are seen getting 25 percent - 35 percent smaller payouts than last year, while average incentive pay for various other specialties is seen falling between 10 percent and 30 percent.

The group forecast to suffer the least damage in the Johnson report is bankers who cater to high-net worth clients. Their average incentive pay is projected to drop 10 percent - 15 percent from 2007 levels. Prime brokers make up the next-best group, down 15 percent - 20 percent.

Overall, Johnson now sees 2008 year-end incentives dropping between 20 percent -35 percent across the industry. The consultant anticipates further declines in 2009, citing a number of economic and political forces.

"There is simply no momentum as we move into next year," Alan Johnson said in a press release. "The trading environment is constrained, credit woes are continuing for several industries, and the investment banking pipeline is weak. Coupled with further staff reductions throughout the industry, we anticipate incentives will erode further in 2009."

Johnson Associates' quarterly compensation analysis is based on ongoing monitoring of the financial services industry and public data from eight of the nation's largest investment and commercial banks and eight of the largest asset management firms.