A Bloomberg story informs us that Wall Street bonuses may be down for the first time in five years. Why has it taken this long to figure that out?
At this point, the estimated decline in bonuses is only 5%, which given the carnage, is rounding error. Admittedly, the Street had a spectacularly strong first half, but bonuses are highly influenced by recent events. Unless Bernanke proves to be a miracle worker, I expect bonuses to fall more than this early estimate.
The piece also reports that junior staff at hedge funds and private equity firms are already being axed. Wall Street employment usually falls 20% from peak to trough in a protracted financial market downturn (note I don’t count the 2001-2002 bear market as of that severity). We are only at the beginning of an ugly process.
Note that the underlying information comes from recruiters, who like real estate brokers, have an incentive to be upbeat until facts on the ground make that impossible.
The credit-market freeze that’s paralyzing leveraged buyouts, mergers and myriad computer-driven trading strategies may cut Wall Street bonuses for the first time in five years.
“There’s a lot of pessimism out there,” said Gary Goldstein, chief executive officer of executive-search firm Whitney Group in New York. “Looking at the world today as we see it and the impact the crunch is likely to have, it looks like bonus pools will decline.”
Bonuses, the financial industry’s annual rite of compensation that typically is a multiple of salary, probably will decline as much as 5 percent from 2006, according to Options Group, the New York-based firm that has tracked pay and hiring trends for more than a decade. While the payouts often far exceeded the average of $220,650 at the biggest U.S. securities firms last year and increased as much as 20 percent from 2005, the subprime-mortgage collapse already has drained the punch bowl…
Except at the most junior levels, traders and bankers receive most of their annual pay in year-end bonuses that are determined in part by the revenue produced by the individual, their division and the firm as a whole. The average bonus per employee at Wall Street’s five biggest firms rose 18 percent in 2006, according to Bloomberg calculations based on company reports.
Individual bonuses vary, with some administrative staff receiving nothing and executives such as Lloyd Blankfein, Goldman Sachs Group Inc.’s CEO, getting more than $50 million on top of his $600,000 salary. Even Blankfein’s pay, which is based partly on the firm’s operating results and stock performance, may be lower. Goldman’s stock, after climbing 56 percent last year, has dropped 12 percent in 2007. Revenue, which gained 49 percent in 2006, rose 11 percent in the first half of 2007….
Recruiters, who are seeing a pickup in resumes from hedge funds and leveraged buyout firms, cautioned that it’s too soon to know what will happen by the time banks start bonus discussions, typically in October. They also note that traders involved in equities, commodities and distressed debt are having a good year and are likely to reap bumper payouts…..
“We’re already seeing a lot of resumes from hedge funds, and we’re seeing them at the more junior level, a lot of these kids that defected to hedge funds for more money or a better lifestyle,” said Deborah Rivera, founder of the Succession Group, a New York-based executive-search and consulting firm. “We’re seeing resumes from private-equity funds that have also let some people go.”
Hedge-fund traders with at least 10 years’ experience, who made an average of $580,000 last year, probably will see pay rise 8 percent to 9 percent this year, according to Adam Zoia, founder of New York-based Glocap Search LLC and co-editor-in- chief of the Hedge Fund Compensation Report. That’s about half of the rate he was expecting before the market’s decline.
“We have just sharply cut our compensation forecasts,” Zoia said on Aug. 17….
Since last falling in 2002, total bonus payouts at the five firms rose 6 percent in 2003, 19 percent in 2004, and 18 percent in 2005. Securities firms typically set aside about half of their revenue to pay compensation and benefits. Of that, about 60 percent is paid in bonuses at year end.
Recruiters don’t expect reductions to be as drastic as they were in the bear market of 2001 and 2002, when the average payout for New York-based securities-industry workers declined 26 percent and 18 percent, according to the state deputy comptroller’s office.