This year's investment banking compensation should shape up better than a "disappointing" 2010, compensation consultant Alan Johnson said to a gathering of the Wall Street Compensation and Benefits Association.
For one thing, 2011 will see higher bonuses, Johnson predicted, with incentive-based pay increasing "moderately," rising 10 to 15 percent. Salaries should trend upward as well, and there could be upward adjustments to base pay at year-end given regulatory pressure to reduce pay incentives.
Private Equity Competition Heats Up
Johnson also sees significant improvement in private equity, which he views as an "industry in rebound" since it's benefited from investors seeking heightened returns. "Low interest rates and poor equity returns elsewhere have helped greatly," Johnson said, requiring investors to seek alternatives for needed returns.
This comes at a time when private equity players are scrambling to poach research talent from some very youthful professionals. "The competition isn't over brand-name executives commanding eight-figure salaries," the New York Times Dealbook reported last week. "Instead, firms are fighting for the affections of bankers barely old enough to rent cars." Analysts from the likes of Goldman Sachs and Morgan Stanley are being romanced by firms such as Kohlberg Kravis Roberts, the Blackstone Group, and TPG Capital, Dealbook said.
Investment Banking Will Fare Better
Where last year saw moderately lower payment levels for traditional Wall Street professionals - except for the asset and wealth managers who fared better due to higher assets under management and improved returns - Johnson expects the investment banking sector to improve this year.
Following a solid 2010 for the industry, he believes more hedge funds will compete for business.
Other predictions by Johnson:
- Wall Street staffing levels will hold fairly steady.
- Compensation ratios will increase moderately as lower payout businesses like proprietary trading are replaced with higher payout businesses such as investment banking, asset management, wealth management, and brokerage.
- Incentives will be more and more driven by performance, markets and competition, to reduce the implication of inequitable "tips."
- There will be more demand for senior research talent, with increased compensation for buy-side research professionals in particular.
Going forward, Johnson says, compensation and benefits transparency needs to improve markedly. One of the most confounding issues is that compensation models today are difficult to justify or even explain. "It is necessary," he said, "to have a compensation system that can be explained and defended."