Bonuses are shrinking, but who will lose the most?

Bonuses were always likely to shrink this year, as investment banks, hedge funds and private equity firms alike struggle against a difficult business environment. But given the impact of Brexit and the uncertainty surrounding the U.S. elections - and it's impact on deal-making and trading revenues - variable compensation isn't likely to shrink too much.

The biggest reductions in bonuses this year will hit capital markets professionals - presumably primarily equity capital markets, where revenues are down by over 50% year on year at most large investment banks - but even here banking professionals should expect a maximum of 25% shaved off their compensation, according to Johnson Associates’ Q2 2016 compensation predictions. Brexit has created additional uncertainty, potential future rising costs and revenue pressure, but those ill effects are being felt more significantly in the UK and Europe than in the U.S.

The report predicts lower incentive compensation across financial services sectors, although asset management bonuses are expected to decrease only modestly this year. Investment banks, which have ensured a difficult first half even after the Brexit vote boosted volumes and revenues within their fixed income divisions, are expected to reduce bonuses across the board.

On the sell side, 2016 bonuses for firm management and staff position, investment banking advisory, sales and trading roles are all projected to sink by as much as 15%, while investment banking underwriting bonuses are expected to decrease by 25% or more, according to the report. Industry-wide completed activity was lower in Q2, causing equity underwriting nosedive, while advisory and debt underwriting revenue was down moderately.

On the buy side, hedge fund bonuses are the most volatile, with a reduction of as much as 15% looming, whereas private equity firms’ and high-net-worth managers’ and advisers’ incentive compensation only expected to drop by 5%.

Over the longer terms, asset management bonuses, buoyed by rising private equity incentives, have increased since 2009, whereas investment and commercial banks’ incentive pools have decreased, albeit less precipitously over the past five years compared to the 2009-2011 period.

[caption id="attachment_252300" align="alignnone" width="662"] Source: Johnson Associates[/caption]

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