KEY POINTS:
The credit-market freeze that is paralysing leveraged buyouts, mergers and computer-driven trading strategies may cut Wall St 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 in the financial industry that are typically a multiple of salary, will probably decline by as much as 5 per cent 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 US$220,650 ($320,000) at the biggest US securities firms last year and increased as much as 20 per cent from 2005, the subprime-mortgage collapse has already drained the punch bowl.
Hardest hit will be employees who create and sell securities backed by mortgages or pools of debt, Options Group said; one in three of whom may lose their jobs unless business picks up by the end of the year, the firm estimates. Bonuses may fall as much as 40 per cent.
Hedge-fund investment managers, whose average payout climbed as much as 15 per cent last year, may see a drop of 5-10 per cent in 2007. Bonuses for employees in fixed-income units may fall by 10 per cent, compared with a 10 per cent gain last year.
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 St's five biggest firms rose 18 per cent in 2006.
Individual bonuses vary, with some administrative staff receiving nothing and executives such as Lloyd Blankfein, Goldman Sachs' CEO, getting more than US$50 million on top of his US$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 per cent last year, has dropped 12 per cent in 2007. Revenue, which gained 49 per cent in 2006, rose 11 per cent 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.
The crisis that started with the mortgage loans to the riskiest borrowers has sent equity and bond prices worldwide on a rollercoaster ride. The market for mortgage-backed securities has dried up. Investment banks haven't been able to find buyers for leveraged buyout loans. Prime brokers may see fees drop as some hedge funds close and others reduce borrowing.
Hedge-fund traders with at least 10 years' experience, who made an average of $580,000 last year, probably will see pay rise 8 per cent to 9 per cent 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 what he was expecting before the market's decline. "We have just sharply cut our compensation forecasts," Zoia said.
The hedge-fund industry, where assets almost tripled to US$1.7 trillion since 2002, leads Wall St when it comes to outsized paydays. The 25 best-paid hedge-fund managers earned an average of US$570 million in 2006, an increase of 57 per cent from the previous year, according to Institutional Investor's Alpha magazine.
Big pay packages at hedge funds and leveraged buyout firms have driven compensation higher at Wall St firms, as they seek to compete for the best traders and bankers. Last year, the five biggest US securities firms paid about $36.5 billion in bonuses, up 32 per cent from a year earlier as the number of employees rose 7 per cent.
Recruiters don't expect reductions to be as drastic as they were in 2001 and 2002, when the average payout for New York-based securities-industry workers declined 26 per cent and 18 per cent.
-Bloomberg
