Most people in the financial services industry should find out how much their bonus will be either this month or next. Will industry professionals be celebrating, cursing and looking for a new, higher-paying job or shrugging their shoulders and saying ‘meh’?
For the 2016 bonus season, recruiting firm Options Group forecasts total compensation for U.S. mergers-and-acquisitions (M&A) investment bankers to decline an average of 10% year-over-year, debt capital markets (DCM) to be flat or unchanged, and equity capital markets (ECM) to decline an average of 15%.
In comparison, compensation consulting firm Johnson Associates predicts that financial services bonuses will be down compared to 2015 pretty much across the board, with bankers’ bonuses down 10% year-over-year, asset management bonuses down between 5% and 10% for the second year in a row and hedge fund managers’ bonuses down 10% to 15% compared to the previous year. Private equity bonuses are expected to be flat.
Bonuses are likely to be flat or down across Wall Street
Alan Johnson, the CEO of Johnson Associates, predicts that financial services bonuses will be down across the board: PE flat, long-only asset management down 5% or 10%, banks down 10% and hedge funds down 10% to 15%.
“For the banks it’s been a trail of tears since the financial crisis, whereas asset management firms were doing great, but are now experiencing fee pressures,” Johnson said. “Bonuses will be down generally, which is surprising given the stock market rally and the Trump boost, but fee pressures and competition has held compensation in check.
“In 2017, banks will start to rebound – with some of the onerous regulations rolled back, maybe the banks will start to do better, which would be good for everybody,” he said. “A leading indicator of that is their stocks have done particularly well since the election, meaning the markets believe that this will be a positive change for the banks.
“Unfortunately I think asset management will be down again due to fee pressures and so much competition in the marketplace from index funds and ETFs.”
This will be a critical year for hedge funds, as their performance has been down three years in a row.
“Most hedge funds have extremely talented people who are well paid, but for their pay to increase meaningfully, they are going to have to do better on behalf of clients, who have been disgruntled,” he said.
Johnson compares the distribution of pay at many financial services firms, including investment banks, to an hour glass.
“You’ve got incredibly smart people at the bottom that are relatively cheap, and you’ve got people at the top that you need to interact with clients, but they’ve been skinny in the middle,” Johnson said. “You have to pay the people who are young and hard working, because they have other options, such as technology companies – banks don’t pay dramatically more than other firms, so they’re trying to change their culture and stop some of the busy work."
Investment banking compensation
Mike Karp, the CEO of Options Group, said ECM bankers in particular are likely to be given smaller bonuses. It has been a tough year in the sector - the $724.2bn in deals was the lowest volume since 2012, according to Dealogic, North America held up better than most locations, but volumes were still down 16% year on year.
“It has not been a robust market – due to Brexit and other factors, things have been rocky, hence low ECM volumes and declining compensation,” Karp said.
However, Karp believes the situation is better for M&A bankers
“For bulge-bracket banks, their investment banking pipeline was just delayed a few quarters – it’s not going away, so there’s an inability to adjust headcount in anticipation of activity that has been pushed back, and many banks may increase hiring activity at the seams for this year,” he said.
M&A was weak in the first two quarters of last year, and while it did come around eventually as investment banks refocused their activity on deal flow, execution and recruiting starting in the third quarter, 2016 was not a rip-roaring year overall. In the U.S. M&A volumes were $1,722.5bn last year, a 21% decline on 2015
“I’m thinking 2017 might be a little bit better – the first two quarters [of 2016] weren’t helpful in M&A activity, as very few deals got done, whereas 2015 was a pretty phenomenal year,” Karp said.
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