Cue the violins and grab your handkerchiefs: Wall Street is facing another year of lackluster lucre. Almost 20 percent of financial-services employees around the world won’t get yearend bonuses, according to Options Group, an executive-search company that advises banks on pay. Those who do collect bonuses may see payouts unchanged from last year or increased 10 percent or less, compensation consultant Johnson Associates estimates. Executives “won’t have to pay up because they’re saying, ‘Where are these guys going to go?’ ” says Michael Karp, chief executive officer of Options Group. “We’re in an environment where a lot of people are just happy to have a job.”
Wall Street banks are trying to deflate pay expectations to avoid a replay of last year, when bonus cutbacks and deferrals surprised bankers and traders, hurting morale and leading to a lot of grumbling. “It’ll never be a nonevent, but if you can take the surprise out and allow people to say, ‘Yeah, that’s within 5 percent of what I expected,’ it becomes less distracting,” says Robert Dicks, a principal at Deloitte Consulting who focuses on compensation and benefits. “It means less hallway chatter and ultimately more productivity.”
Senior managers are making bonus decisions amid industrywide cost-cutting. Some banks, including UBS (UBS) and Nomura Holdings (NMR), are firing investment bank staff. Goldman Sachs Group (GS) and the investment bank divisions of Morgan Stanley (MS), JPMorgan Chase (JPM), UBS, Credit Suisse Group (CS), and Deutsche Bank (DB) set aside a total $37.9 billion for bonuses, salary, and benefits in the first nine months of 2012, down 7 percent from a year earlier, according to data compiled by Bloomberg Industries. Those banks have cut more than 9,000 jobs in the past year. Total pay for investment bankers and traders industrywide will probably fall 8 percent this year, to about half the level of 2007, according to the Options Group report. Banks are struggling to earn the returns shareholders demand amid new regulations that ban proprietary trading and require banks to hold more capital as well as lower deal and trading volumes.
While the payouts may be disappointing, they’re still far higher than what most people will ever see. Loan traders with the title of vice president, the third-highest at most banks, probably will receive salaries and bonuses averaging $800,000 this year, up from $720,000 for 2011, the Options Group report said. Stock traders with the same title may get $290,000, down from $370,000.
Many bankers were caught off-guard when companies chopped 2011 bonuses by as much as 30 percent and limited how much workers got in cash immediately. Morgan Stanley capped cash bonuses at $125,000, while Barclays (BCS) kept them to £65,000 ($103,000). Credit Suisse paid employees a portion of last year’s bonuses in bonds. Some banks clawed back previous years’ pay as they handed out smaller bonuses or none at all, which traders referred to as “negative bonuses,” says Paul Sorbera, president of Alliance Consulting, a New York-based search firm.
Bankers were also surprised in 2011 because expectations had been built up during a strong first half of the year, recruiters say. The 10 largest global investment banks produced $91 billion of revenue from advisory businesses, underwriting, and trading in the first half of 2011, according to data from industry analytics firm Coalition. That plunged to $50 billion in the second half. “Last year the first half was much, much better than the second half, and people got a little carried away early in the year,” says Richard Lipstein, managing director of search firm Gilbert Tweed International. “This year it’s been a generally crummy environment.”
One way banks have been managing expectations is by discussing pay in public, Dicks says. Morgan Stanley CEO James Gorman said in a Financial Times interview last month that banks need to cut staff and compensation, as “the industry is still overpaid.” Goldman Sachs said in a July conference call that it plans to trim $500 million in annual expenses, mostly from compensation, on top of a $1.4 billion reduction earlier this year.
Deutsche Bank, Germany’s biggest lender, said in September it will increase the vesting period for deferred bonuses for top management to five years from three. The bank last month named a panel of business executives and a former German finance minister to review compensation as it addresses criticism on pay. In a speech to investors at a conference in Frankfurt in September, co-CEO Anshu Jain suggested that attendees encourage other banks to institute tougher pay policies. “We’re taking a step in the direction that you wanted us to take,” said Jain. “Please, please, please, now go see my competitors, go see the boards that come to you and ask them this question as well. Let’s level the playing field. It’s in your best interests. It’s in our best interests. And I would even go far enough and say it’s in society’s best interests.”
Despite such pronouncements, almost half of Wall Street employees expect a bonus increase this year, according to a survey of 911 financial professionals conducted from Sept. 26 to Oct. 3 by job-search website EFinancialCareers.com. A smaller number, 27 percent, said bonuses will rise in the next three years, while 31 percent saw no change and 42 percent anticipated declines.
There have been signs of optimism in recent weeks, as the nine largest global investment banks reported a 38 percent jump in third-quarter trading revenue from a year earlier, according to data compiled by Bloomberg. Banks may also start adding some positions they’d been waiting to fill until after the elections, providing some competitive pressure on pay. “Firms haven’t been doing anything for a few years, and you have some pent-up demand,” says Sorbera. “Management is guiding people low because they don’t know yet, and people are expecting it to be like last year, so there could be a surprise to the upside, though it won’t be a big one.”