In a shining example of the law of unintended consequences, when 2012 started Wall Street bankers had expected that all it would take for bonuses to surge and offset 2011's deplorable comp, is another round of QE. Well, QE came and went, not only in the US, but virtually everywhere else, and sure enough the market traded up to new 5 year highs (and just why of all time highs as well), yet something was not going according to plan: profits, and thus bonus accruals. Specifically, revenue from trading cash products such as stocks and bonds, plunged as volatility collapsed whether due to the implicit Bernanke put, or to the explicit selling of VIX puts by the Fed to give the impression that all is well. The result was the elimination of volatility which has put numerous day-traders out of business, and crushed trading volumes, just as we warned would happen in late 2011. Another side-effect of the Fed buying the long end is everyone piling in and frontrunning Bernanke in the 10-30 Year segment, flattening the curve, and making Net Interest Margin profitability a thing of the past. The result has been a year in which despite stocks rising, banker pay is set to tumble even more (for those lucky enough to still even have a job that is, which for UBS and Nomura means about 80% of the employees a year ago) with traders of cash equities and derivatives set to see another 20% drop in comp from 2011 according to Options Group. The end result: 2012 all in comp will be half of what it was in 2007. Say goodbye to the Master of the Universe - they will now have to settle for a galaxy or two at most.
From Bloomberg:
Almost 20 percent of employees won’t get year-end bonuses, according to Options Group, an executive-search company that advises banks on pay. Those collecting awards may see payouts unchanged from last year or boosted by as much as 10 percent, compensation consultant Johnson Associates Inc. estimates. Decisions are being made as banks cut costs and firms including UBS AG and Nomura Holdings Inc.fire investment-bank staff.
Some employees were surprised as companies chopped average 2011 bonuses by as much as 30 percent and capped how much could be paid in cash. That experience, along with public statements from top executives, low trading volumes in the first half and a dearth of hiring has employees bracing for another lackluster year, consultants and recruiters said.
“A lot of senior managers won’t have to pay up because they’re saying, ‘Where are these guys going to go?’” said Michael Karp, chief executive officer of New York-based Options Group. “We’re in an environment where a lot of people are just happy to have a job. Expectations have been managed so low that people will be happy with what they get.”
More modest expectations reflect a new reality as total pay is about half what it was in 2007, Options Group said in a report last month.
Somehow we doubt that even an 8% comp drop will evoke much sympathy for a class of workers that should be receiving government utility salaries following the 2008 wholesale bailout of the entire industry:
Total pay for investment bankers and traders industrywide probably will fall 8 percent, according to the Options Group report. Traders in fixed-income businesses can expect to see a 6 percent increase in compensation, while pay may decline 17 percent in equities and 13 percent in investment banking, the report shows.
Credit traders in loan products with the title of vice president, the third-highest at most banks, probably will receive compensation averaging $800,000 this year, up from $720,000 for 2011, according to the report. Cash-equity traders with the same title may get $290,000, down from $370,000.
Traders of cash equities and equity derivatives will have the biggest drop in compensation, both down at least 20 percent from 2011, according to the Options Group report. Traders in securitized products and emerging markets will see at least a 10 percent jump in pay, the largest gains, the report shows.
Of the declining comp, actual cash will, again, be only a modest portion (assuming none of it is clawed back that is):
Employees were stunned by the 2011 bonuses in part because some banks changed their pay structure, said Joseph Sorrentino, a managing director at New York compensation-consulting firm Steven Hall & Partners. Morgan Stanley (MS) capped cash bonuses at $125,000, while Barclays Plc (BARC) limited them to 65,000 pounds ($103,000). Credit Suisse paid employees a portion of last year’s bonuses in bonds made from derivatives to help the Zurich-based company cut risk and improve its capital position.
About 17 percent of global banks clawed back compensation from previous years in 2011 as European and North American regulators pressured them to impose penalties on employee risk- taking, according to a survey of 63 companies conducted by consulting firm Mercer LLC and released in August.
Banks also have been discussing pay more in public, Dicks said. 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.
Demonstrating the persistency bias still prevalent on Wall Street, a half of the workers once again expect improving conditions. They are all about to be very disappointed in a world in which discretionary SG&A just is no longer there any more:
Still, almost half of Wall Street employees expect a bonus increase this year, according to a survey of 911 employed financial professionals conducted between Sept. 26 and 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. Companies also may start adding positions they had been waiting to fill until after the U.S. elections, providing some competitive pressure on pay, Alliance’s Sorbera said.
Finally, and as always, one firm stands out when it comes to comp, even in the gloomiest of conditions. See if you can spot it on the chart showing comp below:
- UBS: -23% Y/Y
- Deutsche: -12% Y/Y
- Credit Suisse: -11% Y/Y
- JPMorgan: -9.4% Y/Y
- Morgan Stanley: -8.5% Y/Y
- Goldman Sachs: +9.5% Y/Y