Bankers in New York and London are bracing for end-of-year bonuses that recruiters estimate will be 30 per cent to 50 per cent lower, while some may receive nothing as dealmaking falters and economic gloom sets takes hold.
Financiers face disappointment when their compensation awards land in the first quarter, and thousands more of their colleagues could be laid off after hundreds were let go this year, according to recruiters and compensation experts.
Last year, the industry handed out the biggest awards since 2006 as the economy roared back from the pandemic.
But this year, the pace of mergers and acquisitions and stock offerings dramatically slowed as debt financing markets collapsed and stock market volatility hurt valuations. The outlook for a recession also increased as the year progressed with the Federal Reserve aggressively raising interest rates to tackle inflation, cooling economic activity.
For US managing directors at Goldman Sachs Group, leaner times will probably translate to a 40 per cent to 45 per cent decline in average compensation for 2022, according to data provided to Reuters by Sheffield Haworth, a recruitment firm for top executives.
At rival Morgan Stanley, average pay for senior bankers is forecast to slide 35 per cent to 40 per cent according to the report authored by Julian Bell, Sheffield Haworth's head of the Americas and Natalie Machicao, a vice president.
It's a major reversal for dealmakers who made record profits for their firms last year and secured eye-watering payouts for themselves.
“'Flat' is once again the new 'up' this year, with most people just hoping not to see a significant cut in their compensation given how revenues for the industry as a whole have fallen,” said Stephane Rambosson, London-based cofounder of Vici Advisory, which specialises in hiring senior investment bankers.
At JP Morgan Chase, average total compensation for US managing directors is forecast to drop by between 35 per cent and 40 per cent, and pay for senior bankers at Citigroup and Bank of America will probably shrink by about 35 per cent and 30 per cent, respectively, according to Sheffield Haworth.
While the estimates reflect averages, payouts can vary widely depending on individual and group performance.
The banks declined to comment.
Managing directors at Wall Street banks typically earn salaries of $350,000 to $600,000 a year, with bonuses of one or two times their base pay, according to Wall Street Prep, a company that helps aspiring bankers train for the industry. For top performers, incentive compensation can soar to millions of dollars.
The pay slump coincides with a decline in global equity underwriting of 66 per cent, or $517 billion in deal value, value of mergers and acquisitions sank 37 per cent to $3.66 trillion by December 20, after hitting an all-time high of $5.9 trillion last year, the data showed.
The KBW Bank Index, which tracks major US bank stocks, has slumped about 26 per cent this year.
The slowdown comes as the US Federal Reserve and other central banks raise interest rates aggressively to tame inflation, moves that have curtailed economic activity.
Other risks including economic uncertainty spurred by the war in Ukraine, tense US-China relations and supply chain problems fuelled volatility in certain markets.
Traders in fixed income, currencies and commodities performed better than their investment banking colleagues. Compensation for FICC traders will probably rise slightly or stay flat, said Mr Bell at Sheffield Haworth, while stock traders could see a small drop.
Barclays' FICC traders doubled their revenues for the third quarter compared to last year, a bright spot that helped the bank beat expectations despite rising costs elsewhere, according its results in October.
Worsening economic conditions have already prompted firms including Morgan Stanley and Citigroup, to trim their workforces. After an initial round of layoffs this year, Goldman Sachs is planning to cut thousands of employees in the new year to navigate a difficult environment, a source familiar with the matter said.
In the UK, most big firms are discussing and allocating bonuses now, with decisions not usually announced until early next year. Barclays and HSBC have already started to trim staff in underperforming areas of investment banking.
British banks are also under immense pressure to lift wages for their lower-earning staff in Britain as soaring inflation erodes household incomes. NatWest offered the bulk of its 41,500 staff in Britain a pay rise and one-off cash sum after a backlash from lower-paid employees who missed out earlier this year.
“We expect bonus pools to reduce compared to last year, and there will be no bonuses at some institutions,” said Sophie Scholes, a partner at leadership advisory firm Heidrick & Struggles in London.
A situation that rewards star performers over their colleagues “will leave some disappointed”, she said.