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Wall Street bonuses are set to fall this year by as much as 25 per cent, as investment bankers and money managers feel the pinch from rising interest rates that have damped dealmaking activity and curtailed new stock market listings.
An analysis by New York-based pay consultancy Johnson Associates showed that 2023 bonuses across most of Wall Street — from investment banking advisory work to sales and trading and private equity — will on average be either down or flat compared to a year earlier.
“Most Wall Street professionals will have to wait another year for a rebound in year-end bonuses,” Alan Johnson, who runs the consultancy, said in a statement on Tuesday.
Pay on Wall Street ballooned in 2021 as low interest rates, government stimulus programmes and volatile financial markets propelled bonuses to record levels. Global dealmaking is currently languishing at a 10-year low.
But bonuses fell by 26 per cent in 2022, to an average of $176,000 across all financial services employees in New York — the biggest annual drop in year-end incentive pay since the financial crisis — according to data from the state’s comptroller’s office.
On Wall Street, the majority of employees’ pay typically comes from year-end bonuses that ebb and flow with companies’ profits.
Johnson Associates estimated that 2024 would be “another challenging year” for Wall Street due to the lingering impact of higher interest rates and continued geopolitical tensions.
“With the financial markets and overall economy struggling to find footing throughout the year, most business segments remain under pressure to keep pay costs down,” Johnson said.
The likes of Goldman Sachs and JPMorgan Chase have seen their investment banking and trading revenues fall this year, leaving them with less cash to pay staff. The big banks have also been balancing a need to rein in costs with a desire to keep top performers happy, with strong competition for talent from rivals, hedge funds and private equity firms.
“The competition for talent, especially the best talent, remains very, very strong,” Goldman chief executive David Solomon told investors last month.
While work on mergers and acquisitions and debt underwriting remains subdued, bankers in equity capital markets are in line for an increase in bonuses after several high-profile initial public offerings, including German sandal maker Birkenstock and tech groups Instacart and Arm. However, while bankers had hoped the listings would help encourage more companies to go public in 2024, the stocks have struggled since going public.
Bankers working in wealth management, an area where all large banks are trying to grow, are set to see their bonuses rise this year, according to Johnson Associates.
Among traders, Michael Karp, a top Wall Street recruiter and head of Options Group, said fixed-income desks are likely to see the biggest bonuses this year. But across Wall Street, he said, pay cheques are unlikely to be as weak as business has been this year. “The demand from hedge funds and boutique firms to lure talent away continues. The big firms are going to have to pay top performers to retain them.”
Pay at hedge funds is hovering between slight increases or slight decreases depending on the firm, Johnson Associates estimated, with so-called multi-strategy hedge funds outperforming the industry but macro hedge funds faring less well.
Pay at large and medium-sized private equity firms is expected to be an outlier in not seeing declines. However, Johnson Associates did not include so-called carried interest payments that dealmakers earn as incentive fees from the sale of successful investments.
Those lucrative fees are often where dealmakers earn most of their cash pay and they will drop substantially in 2023 as a buoyant environment for deals has cooled.
Through the first nine months of this year, cash pay has declined more than 20 per cent at the three large publicly listed groups, while Apollo has seen a slight uptick in pay as a result of rising fee-related earnings and the growth in its overall headcount.
Some groups have told shareholders they are cutting expenses quickly to meet a more uncertain investment landscape. Earlier this month, the Financial Times reported Carlyle had cut some dealmakers across its US, European and Asian private equity investment teams.
Carlyle chief executive Harvey Schwartz and chief financial officer John Redett told analysts this month the group had uncovered $40mn in annualised cost cuts and was looking for further savings.
“Every single expense is on the table . . . There is no such thing as a sacred expense.” Redett said while noting the cuts would not come at the expense of growth.
