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Choppy markets leave U.S. bank bonus decisions in limbo

Published 2019-12-10, 03:49 a/m
Updated 2019-12-10, 03:49 a/m
© Reuters. Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York

By Elizabeth Dilts Marshall and Imani Moise

NEW YORK (Reuters) - December is always a month of suspense on Wall Street, as dealmakers, traders and money managers at big U.S. banks wait to find out how much they will receive in bonuses.

But this year is more fraught than usual, industry sources said, because executives are waiting until the last minute to allocate bonuses, worried that market volatility could hit earnings.

Those awards typically account for one-third of compensation for employees who receive them, so they are important.

By now, division heads usually have a sense of what a bonus pool will look like and what portion their divisions will get. Although formal bonus communications can happen as late as March, executives and consultants start working on decisions after Labor Day and tend to give unofficial guidance to staff before year-end, sources said. (See related graphic at https://tmsnrt.rs/34XManX )

But because there is so much uncertainty about what might happen in overnight lending in late December, and the ripple effects it could have on other markets, many executives are taking the unusual step of waiting to divvy up bonus pools until the year is completely finished. (https://reut.rs/2Oyklf8)

"There may be people working New Year's because they've got to finalize this January 10 or 15," said compensation consultant Alan Johnson. "People are going to be particularly vigilant to make sure that they're going to be paying the right amount, figuring it out right up to the end of the year."

At one bank last year, trading heads were told in late-December that millions of dollars needed to be shifted from their bonus pool to other divisions, a source familiar with the matter told Reuters on the condition that the bank and person not be named. The industry is trying to avoid situations like that again this year, Johnson said.

Johnson's firm publishes a closely watched annual report forecasting where Wall Street bonuses are headed. It found that most employees will likely see a decline from last year, especially in equities trading where bonuses could fall 10-15%. Investment bankers can generally expect to see declines of 5-10%, Johnson Associates predicted.

The expected declines reflect less-than-stellar results across the banking industry this year. Although the industry has recovered dramatically from the 2007-2009 financial crisis, a fresh round of interest-rate cuts from central banks combined with subdued loan demand, weak trading results and declines in some areas of investment banking have left revenue and profits treading water.

During the first nine months of the year, Goldman Sachs Group Inc (N:GS) and the capital markets divisions of JPMorgan Chase & Co (N:JPM), Bank of America Corp (N:BAC) and Morgan Stanley (N:MS) reported declines of 1-8% in revenue and 8-18% in profit. Citigroup Inc (N:C) was an outlier, reporting flat revenue and a 1% gain in year-to-date earnings.

Even those who worked on big deals or in business areas or that did well — say, bankers who worked on Bristol-Myers Squibb's (N:BMY) $74 billion acquisition of Celgene (NASDAQ:CELG), or traders who generated a lot of revenue helping companies manage falling rates — are not assured of a rich bonus.

GRIM, ANXIOUS

Their bonuses are tied to the performance of divisions and companies overall. That means if a trading division suffers from market chaos, it will get less of the bonus pool, and the overall pool could be smaller because of related losses.

Sources at some of the banks described the atmosphere around bonuses as grim and anxious.

Bonus declines would be coming on top of a weak 2018 bonus season for Wall Street, when the average bonus paid to a securities industry employee in New York fell 17% to $153,700, according to a report by the New York State Comptroller Thomas DiNapoli. (https://tmsnrt.rs/34XManX)

Despite the anticipated declines, many bankers aren't too concerned because even without bonuses, their salaries average $398,600 compared to a broader state average for workers of $79,800, the comptroller found.

© Reuters. Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York

"I don't live my life based on my bonus because its purely discretionary," a JPMorgan investment banker said, shrugging off the uncertainty.

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