Wall Street bonuses will increase about 10 percent this year, half as much as bankers expected as recently as May, after companies including Morgan Stanley reported declining third-quarter revenue, compensation consultants said. ``Everyone came charging out of the gate at the beginning of the year and the market didn't do as well as everybody thought,'' said Deborah Rivera, founder of Succession Group, an executive search firm in New York. ``That's definitely going to have an effect on people's bonuses.'' Morgan Stanley, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. together reported a 16 percent decline in third-quarter revenue from the average of the first and second quarters. It's the biggest drop since 1998 following Russia's debt default and the near-collapse of hedge fund Long-Term Capital Management LP. Revenue is shrinking as New York-based investment banks begin to decide on annual bonuses for bankers, traders and other employees. ``There's clearly pressure on compensation,'' said David Viniar, Goldman Sachs' chief financial officer, when the third- largest U.S. securities firm reported earnings on Sept. 21.
Almost one third of 89 firms surveyed by the Securities Industry Association expect bonuses to be unchanged from a year ago and another third said they haven't decided. Two percent expect bonuses to be ``significantly higher,'' according to the SIA, Wall Street's Washington-based trade group. The survey included Lehman and excluded firms such as Morgan Stanley, Goldman Sachs, Bear Stearns, UBS AG, Merrill Lynch & Co. and Citigroup Inc. Executive recruiters, including Sibson Group and Compensation Resources Inc., said bankers anticipated a 25 percent increase in year-end bonuses in May when earnings were approaching records.
Flat to Lower
Trading desk heads with a decade's worth of experience will probably get an average $1.4 million bonus, down from expectations of $1.6 million in May, said Alan Johnson, who heads New York-based executive recruiter Johnson Associates. Eight years of experience and a managing director title means $825,000, not $1 million, and third-year associates may get $300,000, not $325,000, Johnson said. ``Bonuses always follow the revenue,'' said Marc Baranski, who runs the financial services practice of the Sibson Consulting unit of New York-based Segal Group Inc. Wall Street bonuses probably will rise four times faster than the average 2.5 percent raise that U.S. workers received during the 12 months ended in June, according to the U.S. Bureau of Labor Statistics. The average American's pay is rising at a slower rate than inflation and is now about $38,725, the bureau reported.
Cruz, Pandit
For top bankers, bonuses exceed base pay. Zoe Cruz, 49, the head of fixed income at Morgan Stanley, received a $300,000 salary last year and a bonus of $7.9 million. Vikram Pandit, 47, who heads Morgan Stanley's institutional securities business, got a $425,000 salary and a $6.9 million bonus. Wall Street managers award the largest bonuses to employees responsible for bringing in the largest fees. This year's results are setting up a contest between traders, who posted record results as oil prices surged, and investment bankers, whose fees haven't grown as quickly, Baranski said. ``Compensation will be not only a firm-specific issue but also business-specific,'' Bear Stearns Chief Financial Officer Samuel Molinaro said when the New York-based firm reported earnings on Sept. 22. ``The equity businesses are continuing to struggle with difficult market events and banking is being affected by that.'' Earnings from merger advice slowed as the pace of corporate takeovers declined. About $454 billion of transactions were announced in June, July and August, compared with $971 billion in the previous six months, according to data compiled by Bloomberg.
`Lumpy' M&A
Goldman's third-quarter net revenue from trading and the firm's so-called principal investments was $2.7 billion, down 26 percent from the second quarter, according to the company's earnings report. Goldman's merger advisory business, which ranks first worldwide among investment banks, hasn't fully recovered from pre- recession days in 2000 and remains ``lumpy,'' Viniar said. He also said Goldman will probably earn less money from stock trading in future months. Fees from arranging stock sales also dropped, with $93.8 billion announced worldwide in the three months ended Aug. 31, down from $201.4 billion in the preceding six months, Bloomberg data show. In August, 22 initial public offerings were canceled or withdrawn as trading on the New York Stock Exchange sank to its lowest in more than two years. The scrapped sales amounted to almost half of all transactions taken off the market this year.
Pay Pools
Interest rate increases by the Federal Reserve also are hurting industry revenue. Fees from managing bond sales fell about 30 percent in the three months ended Aug. 31 from a year earlier, Bloomberg data show. Investment banks are setting aside money to pay for year-end bonuses. Morgan Stanley's total compensation and benefits, including the amount set aside for bonuses, was $8 billion at the end of August, up 18 percent from the first nine months of 2003, according to the company's earnings report on Sept. 22. That equals about $150,000 per employee. Morgan Stanley, whose third-quarter profit fell 34 percent from a year earlier, will keep compensation in line with its results, Chief Financial Officer David Sidwell said during a conference call with analysts. Goldman Sachs also has set aside about $8 billion for total compensation and benefits. That amounts to about $400,000 per employee. Pay and benefits at the New York-based firm amounted to 50 percent of revenue in the nine months ended Aug. 31, about the same as last year.
`Slightly Down'
Some Wall Street bankers will be fortunate to see any increase in their bonus, said Michael Karp, managing partner of New York-based Options Group. ``At this point, a lot of the big banks are going to be giving bonuses that are flat to slightly down,'' he said. Limiting bonuses is risky because securities firms can lose top talent by not paying enough, said Anton Schutz, who helps manage $600 million in financial service stocks at Burnham Investors Trust. ////www.bloomberg.com