In Bonus Derby, Fund Managers Trail Bankers

While bankers' bonus expectations are undergoing a broad rebound, 2009 compensation for buy-side professionals looks to extend last year's decline.

That's a key conclusion of compensation consultant Johnson Associates' latest quarterly review of financial services compensation trends.

Ongoing government scrutiny clouds the picture, however, especially for the handful of institutions most dependent on government assistance.

Even as asset markets recover, Johnson projects average year-end incentive payments within asset management, hedge funds and private equity, along with related banking businesses such as prime brokerage and high-net worth, will fall 20 - 35 percent below 2008 levels. That's because fees taken in by hedge funds and other asset management businesses continue to be affected by high-water marks and a drop in average assets under management.

Sell-Side Rebound

The sell side, meanwhile, looks to fare considerably better. Equities professionals, for instance, are projected to earn 20 percent bigger bonuses on average than last year for cash equities, and 30 percent more for equity derivatives. Fixed-income pros, who endured drastic reductions in 2008, will see year-end pay averages snap back by 40 percent for plain-vanilla products and 50 percent for derivatives, according to Johnson.

Those gains come off depressed 2008 levels, and leave projected overall average bonuses for investment and commercial banks some 25 percent below the 2007 peak. For asset management and related services, however, this year's bonuses are projected to be 45 percent below 2007, on average.

Investment banking performance is a mixed bag thus far in 2009. Merger activity remains slow, leading Johnson to project average bonuses for advisory bankers to shrink 10 - 15 percent versus last year. But new stock and bond underwriting is up from last year, fueling Johnson's prediction that bonuses for capital markets pros will recover by 15 - 20 percent.

Staff positions are seen climbing 25 - 35 percent on average, again led by risk management.

Political Interference More Salient at the Pinnacle

Johnson envisions a "significant" percentage increase for senior firm management other than top executives. At the pinnacle, however, Johnson predicts pay is likely to remain depressed for "proxy executives" in TARP recipient banks. (Proxy executives are those whose compensation amounts are publicly reported in documents that companies must file with the SEC.)

While institutions propped up with taxpayer funds are affected the most, the regulatory and political spotlight and looming "Say on Pay" legislation can also impact compensation decisions at firms that repaid their government aid, and even at firms that never took any. "No firm completely escapes public/political scrutiny," the Johnson report observes.

The consultant notes that Wall Street's traditional paradigm is being overhauled. "Artificially low" base salaries are climbing, while cash incentives are correspondingly reduced. Johnson says risk "continues to factor significantly into compensation thinking," affecting how managements formulate base salary, bonuses and deferred compensation.