If you work in the front office of an investment bank and you get a fair bonus for 2019, cherish it. It might not happen again.
As banks mix up the front office and the back office and cut costs to invest in technology, a warning is being sounded that 2019's bonuses might be bad, but that 2020's bonuses will probably be even worse.
So says Alan Johnson, the veteran Wall Street compensation consultant. After forecasting declining bonuses in most business areas this year, as per the chart below, Johnson said today that 2020 will likely be "particularly challenging" thanks to a combination of "revenue pressure....ongoing geopolitical uncertainty," and "less hiring as firms buckle down on expense management." All of this will, "signal a downward impact on compensation in 2020," Johnson said.
If you're an equities trader who receives a 15% cut in your bonus this year, or a fixed income trader who receives a 5% cut as per Johnson's expectations, this means you should count yourself lucky. It could be worse, and probably will be.
Bonuses have become a less significant part of banking pay since the financial crisis, with European banks and U.S. banks in Europe restricted to paying no more than 200% of fixed compensation as a bonus. However, most front office bankers still aspire to receive something - ideally the 200% limit, but if not at least 100% of their salary as bonus.
This is starting to look a bit like wishful thinking. In the middle and back office, including technology functions, big bonuses are less common and pay overall is far lower. Banks' own figures suggest staff in the average control function receive 50% of the average compensation in the front office, and bonuses are usually a small proportion of salary. UBS even announced in February that it would stop paying bonuses altogether to HR, marketing and communications staff. As boundaries between divisions are blurred, so bonuses are likely to ebb.
Banks haven't said much yet about bonuses for 2019, but we know already that most are cutting costs. Average pay per head at Goldman Sachs was $246k in the first nine months of this year. In the same period of 2010, it was $380k.
On the plus side, Goldman's average pay figures are being brought down by the addition of retail banking staff at its Marcus platform, and this isn't the first time Johnson has forecast falling bonuses. He said much the same thing this time last year and by some accounts things were better than expected when bonuses were actually paid.
Photo by Rick Tap on Unsplash
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