Fixed Income Incentives Could Be Down 30% This Year, Says Pay Consultant, with Other Bonuses up Slightly

Investment bankers will see bonuses increase from 5 percent to 10 percent this year, fixed income banking professionals will see incentive-based pay decline 20 percent to 30 percent, and equity asset managers might see no change this year to a slight 5 percent increase.

This is according to Alan Johnson of New York-based compensation consultant Johnson Associates, who also estimates that independent fixed income manager incentives could increase as much as 10 percent this year or not at all, and that hedge fund and private equity incentives will shift 0 percent to 5 percent between 2010 and 2011.

This is a shift for Johnson, who in May predicted bonuses might rise in quite a few areas in 2011, according to eFinancialCareers. "Now, Alan thinks lots of bonuses will fall. He still says some people might be paid more than last year, but their margin of increase is narrowing fast. This is Alan's 'Q2 forecast.' By Q3, we suspect he will have turned fully negative and be hiding in a bunker," writes Sarah Butcher from our UK office.

"After the second quarter, Johnson broadly projects a decline in incentive compensation across financial services, the firm said in an analysis released Friday. For major investment and commercial banking firms, incentive compensation is projected lower, with variation by business," the announcement read.

Essentially, Johnson wrote, "Incentive compensation for the asset management industry is projected to be essentially unchanged year-over-year, with increases and decreases by firm and mix of business. Lack of economic recovery, varying impact of regulation both globally and regionally, business mix, and ongoing uncertainty in world markets are key 2011 incentive drivers," the consultant added.

Headwinds for investment and commercial banking will increase over the remainder of this year, according to the analysis.

However, there should be positive momentum for investment bankers "as a result of industry-wide M&A activity increasing and improved results in debt and equity underwriting reflecting an increase in industry-wide offerings."

Layoffs in Investment Banking

There will be layoffs in investment banking as the business has not been as robust as expected, the report states, and regulations will continue to constrain some business activities.

For hedge funds, meanwhile, first quarter net inflows may be offset by a more difficult second quarter, says Johnson, adding that most firms have surpassed their high-water mark.

An interesting caveat included in the report, considering the flat-to-negative tone: All of this "assumes turbulent market conditions don't lead to 2008 type meltdown."

Johnson's Wall Street Compensation Projections By Business Sector:

· Senior Firm Management

(Excluding Proxy Executives)

Incentive Pay Change: Negative 30 percent to 0 percent

Rationale: Generally moves in line with entire firm, with some variation by business.

· Staff Positions

Negative 20 percent to 0 percent

Rationale: Moves in line with entire firm, with differences by function (i.e., continued focus on importance of risk function.)

· Investment Banking

(Investment and commercial banks, advisory): 5 percent to 10 percent increase

Rationale: Industry-wide M&A activity increasing

· Investment Banking

Investment and commercial banks, underwriting):

Rationale: Higher results in debt and equity underwriting reflecting an increase in industry-wide offerings.

· Equities and Prime Brokerage

(Investment and Commercial Banks)

Negative 15 percent to 0 percent

Rationale: Challenging environment with reduced client activity; solid results in derivatives.

·Other Prime Brokerage

0 percent to 5 precent

Rationale: Improving results on higher client balances.

· Fixed-Income

(Investment and Commercial Banks)

Negative 20 percent to a negative 30 percent

Rationale: Variation due to breadth of products (significantly lower results in commodities); difficult market environment with high levels of uncertainty and decreased liquidity.

Prime Brokerage 0% to +5 percent

Rationale: Improving results on higher client balances.

Asset Management

(Independent and Captive)

Equities: 0 percent to 5 percent

Fixed Income: 0 percent to 10 percent

Rationale: Moderate year-over-year growth in AUM on market appreciation and net inflows slowing on market uncertainty.

High Net Worth

0 percent to 5 percent

Rational: Assets generally more stable; higher asset balances, fee growth on year-over-year market appreciation and higher asset balances.

Hedge Funds

(Independent and Captive)

0 percent to 5 percent

Rationale: First quarter net inflows offset by difficult second quarter; most firms surpassed high-water mark

Private Equity

(Independent and Captive)

0 percent to 5 percent

Rationale: Increased investing interest and activity

Commercial Banking

Negative five percent to five percent

Rationale: Decreasing provisions for credit losses; loan and deposit growth beginning to improve

Finally, Johnson predicts that:

Year-to-Date compensation & benefits as a percentage of net revenue ratios:

....may increase moderately as lower payout businesses (i.e., proprietary trading) are replaced with higher payout

(i.e., investment banking, asset/wealth management, brokerage), consistent with mandate to reduce risk and focus on customers

Year-to-Date compensation & benefits as a percentage of pre-tax re-compensation net income:

....may also increase moderately as lower payout businesses (i.e., proprietary trading) are replaced with higher payouts (i.e., investment banking, asset/wealth management, brokerage), consistent with mandate to reduce risk and focus on customers.