Securities Firms Ready Staff for Year of the `Zero Bonus'
By Christine Harper
New York, Oct. 28 (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley and other investment banks are planning to cut bonuses by as much as 50 percent this year and eliminate them altogether for many employees, bankers and headhunters said.
Global mergers dropped by almost a third in the first 10 months of 2002, and share sales are down 10 percent. That has reduced securities firms' revenue, forcing them to trim costs by taking compensation to levels last seen in the mid-1990s.
Managing directors, the most senior investment bankers, may get $250,000 to $350,000 in bonuses, down from $1.5 million to $1.75 million at the peak of the market in 2000, headhunters said. That's on top of base pay of about $200,000.
``The very top people can still earn exceptional amounts of money, but the other end of the scale will be zero'' bonuses, said Stephen Kendall, head of European equities at Bank of America in London. ``The differentiation will be huge.''
Vice presidents, who rank below managing directors, may see their premiums fall to about $150,000, from as much as $1 million in 2000, headhunters said. Their salaries average about $120,000 to $150,000. Associates, bankers who are typically recent graduates from business school, will be lucky to get $40,000 bonuses, on top of base pay of $55,000 to $85,000.
``We have lowered compensation to go back to pre-boom levels,'' John Mack, head of Credit Suisse First Boston, said at a conference this month. The firm is looking at ``the way we travel, the way we entertain'' and other areas to reduce costs, said Mack, who has announced 6,550 job cuts since he took over the firm in July 2001.
Slump in Mergers
Bonuses in some areas of investment banking, such as mergers and acquisitions, will be at the lowest level since 1995, said Rupert Channing, head of the U.K. financial services practice at Heidrick & Struggles International Inc., a recruitment company.
There have been more than 14,800 corporate acquisitions worth $919 billion in the first 10 months of this year, compared with about 20,600 valued at $2.6 trillion in the same period of 2000, a record year for mergers, according to Bloomberg data.
Goldman Sachs, the No. 1 takeover adviser, has worked on 153 transactions worth about $200 billion so far this year. That's down from more than 300 takeovers worth $760 billion in the same period in 2000, the Bloomberg figures show. In the first nine months of this year, Goldman's investment-banking revenue from financial advisory work fell 29 percent from a year earlier.
Credit Suisse First Boston, Morgan Stanley, J.P. Morgan Chase & Co., and Lehman Brothers Holdings Inc. are among the investment- banking firms that reported a drop in third-quarter profit. Bloomberg's Wall Street Index of securities firms has declined 22 percent this year as earnings and revenue sank.
Job Cuts
Compensation and benefits at investment banks are usually about half of revenue. Morgan Stanley, Goldman Sachs and Lehman are typically the first to pay premiums. Citigroup Inc.'s Salomon Smith Barney investment bank and Credit Suisse First Boston pay as late as March.
Securities firms have cut 61,000 U.S. jobs, or 8 percent of the total, in the 16 months since a May 2001 peak, data from the U.S. Bureau of Labor Statistics show. U.K. financial services companies will have eliminated 20,900 jobs by the end of the year, or 6 percent of the workforce since 2000, according to the Centre for Economics & Business Research.
``It's very hard to ask for a big bonus when there are dead bodies in the cube next door,'' said Mike Vogelzang, president and chief investment officer of Boston Advisors, which manages assets worth about $2 billion, including Goldman Sachs shares. ``Nobody's expectations are very high.''
The decline in bankers' pay has had a ripple effect on other parts of the economy, such as the housing market.
Notting Hill Homes
New York apartment sales declined 18 percent in the third quarter because of shrinking demand from Wall Street executives, according to appraiser Miller Samuel Inc. In September, sales of homes worth 1 million pounds ($1.6 million) or more in London neighborhoods such as Chelsea and Notting Hill fell 15 percent from last year, said David Moulton, who helps find homes for rich clients at estate agent Knight Frank. He expects purchases driven by bonuses to plunge 40 percent in the first quarter.
Although banking executives have made it clear to staff that pay will be reduced, final decisions haven't been made. Bonuses this year may include more stock, or options, rather than cash, headhunters and bankers have said.
Citigroup's European chairman, Win Bischoff, said last month that banks will trim both jobs and pay. CSFB's investment-banking chief, Adebayo Ogunlesi, told bankers to rip up employment contracts that guaranteed bonuses.
No Bonus
``Historically, if you got a zero bonus, that was as big a message as you'll ever get to leave,'' said Andrew Lowenthal, global head of the financial services practice at Egon Zehnder International, a recruitment firm. ``This year, people will say I'd rather get a zero bonus and have a job, because there's nowhere else to go.''
Bankers at firms including Goldman Sachs, Morgan Stanley, Merrill Lynch & Co., UBS Warburg and Salomon Smith Barney declined to discuss what they expected for their own bonuses.
Banks can't always get away with reducing pay. Earlier this year, HSBC Holdings Plc lost about 150 people from its U.K. securities unit after eliminating bonuses. Firms such as Merrill Lynch and Goldman Sachs, whose business depends on investment bankers, have to be more cautious.
``We want to pay fairly -- and we will,'' Tom Patrick, chief financial officer of Merrill Lynch, said in an interview. ``Our goal is to keep people's expectations in line with what we can afford.''
Goldman's Earnings Rise
People that trade and sell bonds will probably fare better than equities and mergers bankers, because their business hasn't declined as much. In the third quarter, Goldman Sachs's earnings rose for the first time in eight quarters, helped by revenue from trading fixed-income derivatives, investment-grade bonds, mortgages and currencies.
``We expect M&A and equity-related bonuses to see the steepest falls,'' said James Hogarth, managing director at Hogarth Davies Lloyd, a financial services recruitment firm. ``You're not going to limit payment to a couple of million dollars for a star proprietary trader who makes you $75 million.''
Even without a bonus, managing directors at investment banks make about five times the average annual salary in the U.S. and U.K. The total compensation of an associate straight out of business school is about three times average pay.
``We're going back to the days of bonuses being related to performance,'' said Bank of America's Kendall. In the last five years ``it was like a God-given right that when you came into this industry you would get a bonus.'' |
