Bank bonus outlook 2010/11 New regulations and lower revenues are expected to shrink bonuses for global investment bankers by Eric Moskowitz
November 2010 Estimated bonuses will be flat to down 5 percent on average for the largest global financial services firms compared with 2009. Asset management, hedge fund, and private equity firms will receive slightly higher bonuses (10 to 15 percent), while fixed income and equity personnel will see the largest declines across the globe.
“It’s not about the money. It’s about the game,” quipped fictional financier Gordon Gekko in the recent “Wall Street” movie sequel. But this time of year might make even Mr. Gekko rethink that sentiment. Since Labor Day, conversation topic No. 1 in investment banking circles has been bonuses, which make up 80 to 90 percent of top officers’ total compensation. Secretive discussions over how much higher or lower bonuses will be compared with last year are not only a sign that the global banking industry truly has come back from the brink, but also highlights the renewed importance of banks determining the right blend of year-end payments. To follow is a preview of 2010/2011 bonus expectations in the financial services industry as prepared by Korn/Ferry International based upon market research and in-depth conversations with key banking clients and sources around the world. The early word on the Street (or the City [London] or the Central [HK]) is that bonuses for the largest global financial services firms will be relatively flat to down 5 percent on average versus 2009. Lower revenue and compensation outlays, combined with appreciably higher employee counts versus 12 months ago, will make it difficult for management to be aggressive. Fourth-quarter business also will affect final bonus decisions significantly because of the choppiness of banks’ results so far this year.
Investment banking divisions generally will see bonuses 10 to 15 percent below last year’s levels. Even though global M&A volumes are higher through nine months of 2010 compared with last year, they remain at about half the level of 2007, according to Dealogic. Fixed income and equities divisions are both experiencing subpar years as lower volumes slice into profits. New and proposed regulations also will continue to affect bonuses, especially in the European Union. Asset management, hedge fund and private equity firms, however, are on track to pay bonuses that are on average 5 to 10 percent higher because of elevated Assets under Management (AUM) and better year-over-year performance returns, according to Korn/Ferry International analysis. Taking into account estimates for investment banks, asset managers, private equity firms, and insurance companies, overall indications point to a relatively flat bonus outlook. After three quarters of 2010, financial services executives are indicating that global investment bank earnings will generally not be as strong as in 2009. The reason? Fixed income and equity trading volume—the biggest driver of profit during the 2005-2007 boom—fell off a cliff. Even Goldman Sachs—the long-time leader in fixed income—recorded third-quarter revenue of $3.77 billion, 37 percent lower than the same quarter in 2009.
Figure 1 Global bank compensation and revenue analysis* Compensation 2010**
Compensation 2009**
Compensation up/down % vs. 2009
Revenue 2010**
Revenue 2009**
Bank of America
$26.30
$24.20
9%
$87.8
$94.6
29.9%
0.8%
Citigroup
$18.20
$18.70
-3%
$68.2
$74.9
26.7%
-6.5%
CHF11.2
CHF12.6
-11%
CHF24.1
CHF26.5
46.6%
6.5%
Deutsche Bank
€9.6
€9
7%
€23.2
€22.4
45.5%
5.1%
Goldman Sachs
$13.10
$16.7
-21%
$30.5
$35.6
43.0%
11.7
JPMorgan Chase
$21.60
$21.8
-1%
$76.6
$77.3
28.1%
7.2%
$12
$10.7
12%
$23.8
$17.0
50.4%
1.4%
CHF13.14
CHF13.22
-1%
CHF26.7
CHF22.4
49.1%
-6.4%
Firm
Credit Suisse
Morgan Stanley UBS
Note: * Data for compensation and revenue in billions, USD unless otherwise indicated. ** Compensation and revenue data is through first three quarters.
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Compensation Total Employees as a % of net up/down % revenue - 2010 3Q2010 vs. 3Q2009
Source: Bloomberg, Company filings, 2010.
The decrease was due to significantly lower revenue in interest rates and credit, according to CFO David Viniar. Overall earnings were down 31 percent. Equities revenues also were subpar. “While there have been no big losses to worry about (e.g., Jerome Kerviel’s $7 billion loss at Societe Generale), trading volumes have remained low through the second and third quarters,” says one regional head of equities at a European-based bank. As proprietary-trading businesses are shuttering to adhere to new regulations, some traders have abandoned global investment banks to join private equity firms and hedge funds. Such non-bank firms like Blackstone, KKR, and Fortress, which are not as scrutinized by regulators, are in build-out mode. KKR, for example, recently hired much of Goldman Sachs’ Principal Strategies team—talent available because Goldman soon will be required to exit the prop-trading business. All three firms’ revenue and compensation also are projected to increase. At Blackstone, revenue is projected to be up 50 percent to $2.7 billion, from $1.8 billion in 2009. Global high-yield banking is a relative bright spot, as volumes rose 70 percent to $282 billion through the first nine months of 2010 on a yearover-year basis. These junk bond deals generate fees four times as high as investment-grade underwritings, according to Bloomberg data. The buoyancy of this market equates to higher bonuses for executives at market leaders Citi, JPMorgan Chase, Bank of America, and Credit Suisse.
“ While there have been no big losses to worry about (e.g., Jerome Kerviel’s $7 billion loss at Societe Generale), trading volumes have remained low through the second and third quarters.”
“Stars in commodities, FX, and junk underwriting will be up,” says one senior investment banker at Morgan Stanley, who requested anonymity. “Everyone else will be down [in bonuses versus last year].” Significant revenue producers (and their teams) will once again receive larger-than-average portions of what is still a substantial-sized bonus pool at the global investment banks. One star investment banker who recently “traded away” (left for another bank) says his former boss was guaranteed a $15 million package for 2011. Another bank regional head is expected to earn $11 million. Investment banking industry groups expected to receive higher-than-average pay are FIG and Energy. Two-thirds of these payouts are in the form of deferred stock, which normally vests over a three-year period, according to Korn/Ferry compensation data. This year, global banks generally set aside less money for their employees. During the first nine months of 2010, Goldman Sachs accumulated $13.1 billion for compensation and benefits, or 43 percent of its total revenue. That represents an average of around $370,000 per employee, compared with $527,000 for the first nine months of 2009. That last datapoint is a bit misleading since the firm put very little fourth-quarter profit into compensation last year, ending the year at $16.2 billion.
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A better example may be the bellwether bank, JPMorgan Chase, because it is expected to finish first in global investment banking (equity capital markets, debt capital markets, and M&A) revenue for the second straight year. The New York–based bank disclosed in October that compensation costs in its investment banking unit through the first nine months were down 10 percent, or $900 million, to $7.9 billion. The average bonus was on track to fall to $299,000, from $354,000 at the same point a year ago. Overall bonuses are expected to drop 1 percent for all of JPMorgan Chase.
Global regulatory outlook for financial services companies Bonuses also will be affected by government-led regulations, especially in the U.S. and U.K. For example, the U.K.’s Financial Services Authority (FSA) forced the top 15 banks doing business there to defer 40 percent of bonuses— and 60 percent above £500,000 in compensation—over three to five years and outlawed so-called “multi-year” guaranteed bonuses. Those restrictions come on top of a 50 percent “super-tax” on discretionary bonuses over £25,000. The top 15 banks are in most cases making up the difference in bonus pay to their employees.
Insurance companies and pressure to raise base pay executives in the future.
This year, U.K. employees have jumped to more lucrative opportunities when firms did not pay. Senior staff at Goldman Sachs and Credit Suisse in London, for example, defected last year to hedge fund and private equity firms when the firms cut their pay asset managers may feel in response to the bonus tax. This trend is expected to accelerate when hiring banking after this bonus season. It is now common for banks to place into new contracts “clawback” provisions, which require repayment or the return of unvested stock in the event of poor financial performance at the bank. The latest word from the FSA was that around 200 Material Risk Takers (MRTs) would be subject to a clawback in the European Union for up to 60 percent of their bonus awards. The Committee of European Banking Supervisors (CEBS), in conjunction with its Capital Requirements Directive (CRD) on risk, is imposing the harshest regulations. U.S. regulators so far have not imposed any bonus taxes, and there have been relatively few new Asia Pacific–specific regulations installed. This should continue to prompt banks to move more trading resources to the region, including commodities traders to Singapore. Future legislation from CEBS—which provides guidelines for EU banks and local branches of non-EU banks—may include capping bonuses at a certain percentage of base salary.
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The one area where the global bank community now has an advantage over asset managers and insurers is base salaries. From mid-2009 to mid2010, banks boosted base salaries for Managing Directors anywhere from 50 to 80 percent, rising as high as $750,000 in London, according to data compiled by Korn/Ferry. Insurance companies and asset managers may feel pressure to raise base pay when hiring banking executives in the future. If 2010 revenue ends up decreasing compared with last year, Wall Street may lay off employees before bonus season in order to keep bonus pools high. U.K.-based Barclays Capital and Zurich-based Credit Suisse already have cut some staff, while Morgan Stanley and Nomura have hiring freezes in place in fixed income.
Figure 2 Worldwide mergers and acquisitions activity in the banking sector Advisers ranked by transaction values when announced. Values include net debt of target companies. * Credit is given to both target and acquiring companies’ advisers.
First 9 months 2010 Adviser
Value (billions)
No. of deals
First 9 months 2009 Value (billions)
No. of deals
Goldman Sachs
$419.9
246
$470.2
187
JPMorgan Chase
$369.3
223
$376.4
220
Morgan Stanley
$333.8
254
$462.2
204
Credit Suisse
$331.1
192
$249.9
165
Bank of America Merrill Lynch
$284.9
182
$271.4
155
Barclays Capital
$280.5
114
$192.9
61
Deutsche Bank
$244.2
197
$177.0
167
Citi
$216.3
148
$341.8
156
UBS
$210.3
211
$171.5
168
Lazard
$195.5
177
$244.2
152
$2,028.3
30,666
$1,645.8
27,343
Industry totals*: Source: Dealogic, 2010.
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Asia Pacific outlook The exception remains Asia Pacific (excluding Japan), according to Korn/ Ferry consultants in the region. Year-over-year fixed income revenue is higher, but not near levels hit in 2007. Deutsche Bank, however, seems to be bucking this trend and is expected to report strong revenue growth in the region for 2010, according to Korn/Ferry consultants. Equities personnel, however, are expecting bonuses that are 10 to 20 percent below last year’s levels. (Bonuses in the region generally are paid in March and April—later than in the U.S. and Europe.) Less regulation and fewer qualified candidates should boost the overall bonus picture as banks shift more resources and talent to these regions.
Figure 3 2010-11 investment banking bonus calendar Announcement date*
Payment date**
Bank of America
Jan. 20
Jan. 28 & Feb. 4
Barclays
Feb. 16
Feb. 25 & Mar. 4
Citi
Jan. 19
Jan. 28 & Feb. 4
Credit Suisse
Feb. 10
Feb. 25
Deutsche Bank
Feb. 3
Feb. 18 & Feb. 25
Goldman Sachs
Jan. 21
Feb. 5
JPMorgan Chase
Jan. 14
Jan. 28
Lazard
Feb. 3
Feb. 15 to Feb. 28
Mitsubishi UFJ
Feb. 3
Feb. 25 & Mar. 4
Morgan Stanley
Jan. 20
Feb. 5
RBC
Dec. 3
Dec. 17
UBS
Feb. 8
Feb. 25
Firm
Note: * Approximate date; most companies have not yet announced a confirmed date. ** Bonus payout dates can vary slightly by asset class and by region.
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Conclusion This will be a rather choppy year for bonuses. Global banks still under the regulatory spotlight will probably pay on average slightly lower bonuses than in 2009, though there appear to be bright spots in high-yield, private banking, and FX/commodities trading. Bonus decreases will be most evident in fixed income and equities as firms move resources away from sales and trading and into commercial and investment banking. By all accounts, it was a very important and “stabilizing� year for asset managers, insurers, hedge funds, and private equity firms. These firms generally will hand out bonuses slightly higher than a year ago as all indications point to still-higher AUMs in 2011. Overall, bonuses will not reach levels hit in the peak year of 2007, but for global bank executives and board directors still in the hot seat, that may be just fine.
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Eric Moskowitz is the Senior Director of Market Intelligence for Korn/Ferry International’s Global Financial Market, based in New York.
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