Wall Street banks are deflating pay expectations to avoid a replay of last year when cutbacks on bonuses and increased deferrals surprised bankers and traders.
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 (UBSN) and Nomura Holdings Inc. (8604) fire investment-bank staff.
Some employees were taken by surprise as companies chopped 2011 bonuses by as much as 30 percent and capped the cash portion. 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. Firms are struggling to earn the returns shareholders demand amid higher capital requirements, a proprietary-trading ban and lower deal and trading volumes. Of the 10 largest global capital-markets firms, the only one trading at more than book value is UBS, which eclipsed that mark after pledging last month to shrink its investment bank by half.
Goldman Sachs Group Inc. (GS) and the investment-bank divisions of Morgan Stanley, JPMorgan Chase & Co. (JPM), UBS, Credit Suisse Group AG (CSGN) and Deutsche Bank AG (DBK) set aside a total of $37.9 billion for pay in the first nine months, down 7 percent from a year earlier, according to data compiled by Bloomberg Industries. Those firms have cut more than 9,000 jobs in the past year.
The compensation figures include money allocated for paying salaries and bonuses as well as costs from deferred bonuses in previous years coming due. Wall Street firms typically reserve a portion of revenue throughout the year for employees and sometimes make adjustments in the fourth quarter, such as when New York-based Goldman Sachs reported negative compensation costs by cutting its accumulated pay pool in the last three months of 2009. Spokesmen for the banks declined to comment.
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.
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 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.
Some banks clawed back previous years' pay as they handed out smaller or no bonuses, which traders referred to as "negative bonuses," said Paul Sorbera, president of Alliance Consulting, a New York-based search firm.
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.
Bankers also were surprised last year because expectations had been built up during a strong first half, recruiters said. The 10 largest global investment banks produced $91 billion of revenue from advisory, underwriting and trading in the first half of 2011, according to data from industry analytics firm Coalition Ltd. That plunged to $50 billion in the second half.
"Last year, the first half was much, much better than the second half, and people got a little carried away early in the year," said Richard Lipstein, managing director of New York- based search firm Gilbert Tweed International. "This year, it's been a generally crummy environment. It's been a year of managing expectations."
Low expectations this year have been driven in part by a lack of companies willing to poach non-star traders as banks exit some capital-markets businesses, said Options Group's Karp.
UBS said last month it's winding down much of its fixed- income trading and cutting as many as 10,000 jobs. Royal Bank of Scotland Group Plc (RBS) said this year it was exiting most merger advisory and equities trading. Nomura Holdings, the Tokyo-based bank that added employees in the U.S. after the credit crisis, has pared jobs in its Americas equities division as it seeks to reduce costs outside Japan.
The impact on morale and the amount of grumbling following decisions about 2011 compensation also has led firms to take a more active role tamping down expectations for employees, said Rose Marie Orens, a senior partner at New York-based Compensation Advisory Partners LLC.
"It'll never be a non-event, but if you can take the surprise out and allow people to say, 'Yeah, that's within 5 percent of what I expected,' it becomes less distracting," said Robert Dicks, a principal at New York-based Deloitte Consulting LLP who focuses on compensation and benefits. "It means less hallway chatter and ultimately more productivity."
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.
The bank, based in Frankfurt, last month named a panel of business executives and a former German finance minister to review compensation as it addresses criticism on pay. CEO Anshu Jain urged investors in September to hold other firms accountable for instituting longer deferrals and clawbacks.
"We're taking a step in the direction that you wanted us to take," Jain, 49, said at a conference in Frankfurt. "Please, please, please, now go see my competitors, go see the boards that come to you and ask them this question as well.
"Let's level the playing field," he said. "It's in your best interests. It's in our best interests. And I would even go far enough and say it's the society's best interests."
James Gorman, 54, CEO of New York-based Morgan Stanley (MS), said in a Financial Times interview published last month that banks need to cut staff and compensation as "the industry is still overpaid." Goldman Sachs said in July it plans to trim $500 million in annual expenses, mostly from compensation, on top of a $1.4 billion reduction earlier this year.
Pay at all levels will continue to fall, as "the readiness among shareholders to accept very high salaries has certainly decreased," Credit Suisse Chairman Urs Rohner told Basler Zeitung in an interview published Nov. 10.
"Five years ago, compensation wasn't the topic of conversation in every town hall, in every public statement that senior leaders made," Dicks said. "Senior leadership is providing much more broad-brush, organization-level information about the direction of comp and the vehicles that comp will be paid in."
Wall Street banks probably won't make changes to the structure of bonuses on the scale they did last year, Steven Hall's Sorrentino said. While that will make pay packages more palatable, it also means employees will continue to get less cash than before the financial crisis, he said.
"Most of the changes have been made already in terms of lengthening vesting, holding back some pay in the form of deferrals and stock and the continued use of clawbacks," Sorrentino said. "A couple years ago, if I told you your comp was $100, you got $100. Now, it's $50 in your pocket and $50 if you're here in three or five years."
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.
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.
"Firms haven't been doing anything for a few years, and you have some pent-up demand," Sorbera said. "Management is guiding people low because they don't know yet, and people are expecting it to be like last year, so there could be a surprise to the upside, though it won't be a big one."
Below is the compensation expense for the first nine months of 2012 compared with the same period a year earlier at Goldman Sachs and the investment-bank divisions of Morgan Stanley, JPMorgan, Credit Suisse, Deutsche Bank and UBS, as compiled by Bloomberg Industries.