How low will analyst bonuses go?

We're fast approaching the time of year when banks' most junior cohort - analysts - are informed how large or small their bonuses will be. Most will find out in June, although Rothschild's analysts (and more senior bankers) will be told this week.

It's still too early to get any firm handle on the numbers, but a big drop seems likely. Based on revenues at the end of April MergersandInquisitions (from whom we shamelessly plagiarized the title of this article) is predicting a fall of 30-50%.

We have spoken to several recruiters and junior bankers who think the reduction is likely to be at the top end of this range. Their rationale for a big fall is as follows -

Corporate finance teams are still over-staffed:

Although FIG and healthcare are busy, other teams aren't. There may be further redundancies later in the year, so there's little need to pay moderate performers well (or indeed to pay them anything at all).

Competition for top analysts from private equity funds and hedge funds has abated:

Between 2004 and 2007, analyst pay was driven upwards by hedge funds' and private equity funds' appetite for investment banks' most prized junior employees. Now, many hedge funds are struggling and private equity funds are mostly interested in hiring people with previous private equity experience. "Their emphasis is on individuals with exposure to portfolio management," says Abid Hussein, head of financial services at EM Group.

There are lots of people out of the market:

With plenty of analysts already let go over the past 12 months, analysts still in work should feel sufficiently shell-shocked to consider their bonus their job.

Associate bonuses were down by an average of 50%:

Cutting analyst bonuses by the same amount will maintain the differential.

However, we also came across bonus bulls who think that the top cohort of analysts will get paid handsomely for the following reason:

Markets are picking up:

What with green shoots, big rights issues and a flurry of deal activity, banks need to ensure that they retain their best performing analysts to cope with the possibility of a heavier workload. Expect the top tier to be paid well as a result.

Equally, some people are forecasting higher salaries for analysts, even if their bonuses fall. Merrill is rumoured to have raised salaries for second and third year associates to 77k, up from 65k and 70k respectively. "Most analysts are expecting a salary increase in line with that," says one recruiter.

To recap, here's what we said top ranking City-based corporate finance analysts were paid last year:

First-year analysts: 35k-37k base; 16k-35k bonus (up to 40.5k at Goldman and Morgan Stanley).

Second-year analysts: 45k base; 20k-45k bonus (up to 55k at Goldman and Morgan Stanley).

Third-year analysts: 50k base; 40k-60k bonus (up to 70k at Goldman and Morgan Stanley).

Source: EM Financial Services