Pay Rebound Falls Shy of Recent Peaks

Good news: Get ready for your largest year-end bonus since the credit bubble burst.

Bad news: The credit bubble burst the year before last. So while most sell-side traders, capital markets bankers and support staff on Wall Street will get a fatter payday than they did in 2008, even those categories' average payouts will fall short of 2007 or 2006. Many other business segments - including asset management, wealth management and the banking groups that cater to them, as well as merger advisory and commercial banking - will pay less on average for a second straight year.

That's the gist of Johnson Associates' latest quarterly projection for 2009 financial services incentive pay by industry sector.

The report, issued Thursday, largely repeats Johnson's second-quarter forecast published in August. The Wall Street compensation consultant's top theme for 2009 remains the sharp divergence between the sell side - whose average incentive pay per employee is seen recovering 40 percent this year after plummeting 45 percent in 2008 - and the buy side, whose average payout is set for a further steep decline after 2008's 25 percent drop.

Why the Gap?

Among big banks and broker-dealers, profits have rebounded strongly this year thanks to higher trading volumes, less severe asset write-downs and recovering stock and bond issuance. "As firms have gotten healthier, they pay their people more," Johnson Associates Managing Director Alan Johnson explained to The Wall Street Journal.

Meanwhile, the buy side's continued slide stems from an inherently backward-looking business model. Fees for both wealth management and asset management (including hedge funds) are always based on average value of assets over the preceding period. Although asset markets have gained this year, when tallied over the year to date prices haven't fully caught up with 2008 annual averages. On top of that, most hedge fund incentive fees are subject to a "high-water mark," which means those fees stop accruing until clients fully recoup losses they suffered in the fund.

Segment-by-segment, the only big bonus changes we noted in Johnson's latest forecast compared with the one three months ago involve equity and fixed-income traders (materially extending already large bonus rebounds estimated in August) and asset management (a materially smaller year-over-year decline than envisioned in August).

Other Takeaways

- Johnson Associates looks for hiring to improve from "frozen to so-so" in 2010, and says clients are starting to express concern about non-compete clauses.

- Recovering asset prices may breed overly rosy bonus expectations among portfolio managers and other buy-side professionals. Combine that with larger-than-usual variations in performance and compensation among different fund companies, and you have a recipe for mass migrations of fund employees after bonus season.

- The sell side's average bonus per employee for 2009 will still be more than 20 percent smaller than 2007 - even after this year's projected 40 percent rebound and 15 percent fewer jobs industry-wide (in New York at least) among which the bonus pool is shared. (Pssst! Don't tell the New York Times' Eric Dash or his editor or headline writer.) The average bonus on the buy-side will be 45 percent smaller than 2007, Johnson Associates projects.

- The New York Times says a "typical senior fixed-income trader can expect a total pay package of about $930,000 in cash and stock, compared with a package last year of about $695,000." Those numbers likely came from Johnson too, although the Times story doesn't say so explicitly. (The summary forecasts Johnson publishes each quarter do not state dollar amounts.)