Investment banking underwriting bonuses to soar 20% or more

The revival in equity and debt capital markets activity in 2017 is likely to feed through to bankers' back pockets - bonuses could be up by as much as 20% this year.

In its latest update on bonus predictions for 2017, compensation consultants Johnson Associates says that ECM and DCM bankers will get at least 10% more, but as much as 20%. ECM revenues have been particularly resurgence in 2017 - after a difficult year last year - up by at least 25% at all major banks in the first half, but by over 80% at Citigroup.

While advisory underwriting was flat to up modestly, industry-wide M&A was activity higher in Q2 and the pipeline remains healthy, so they can hope for bonuses at least equal to or 5% higher than last year, says Johnson Associates. That was a big improvement over the post-Q1 outlook.

Johnson Associates projects equities trading incentives to be down slightly, perhaps -5%, due to declining client activity and lower volatility, whereas fixed income trading incentives are likely to be flat to up slightly – in the range of 5% year-over-year – based on better Q2 performance.

Buy-side bonuses

After Q2, Johnson Associates projects that incentive compensation for asset management will be flat to up moderately, with bonuses for both long-only and hedge fund managers likely to be up as much as 5%.

Q2 inflows and moderate performance relative to benchmarks stabilized the traditional asset management industry, although the report noticed that the focus on developing new products and strategies lead to higher costs.

In addition, fee pressures are stifling asset managers’ revenue growth, and in many cases, funds’ performance is not matching the fees they charge in the minds of investors as the stock market continues to hit record highs.

Those factors have led to ongoing cost-cutting measures and headcount constraints, according to the report.

Hedge fund incentives will be flat to slightly higher year-over-year as outflows subside with investors’ expectation of higher volatility. Q2 returns varied widely by strategy, and many hedge funds trail strong broad market performance, so fee pressures will continue.

On the other hand, private equity continued its positive momentum, leading to an increase in incentive and equity bonuses of at least 10% and as much as 20% or more year-over-year (excluding carry).

PE experienced better returns and asset inflows in Q2, but the report notes that there are fewer investment opportunities due to higher market valuations, and the high dry powder levels are projected to continue.

Alternatives continue to benefit from investors seeking returns and diversification, although the Johnson Associates report found that regulatory and political unknowns continue to spread caution throughout the industry. The report notes that market activity and interest rates will be key 2017 incentive drivers going forward.

Photo credit: JamesBrey/GettyImages