Based on a study by compensation consultant, Johnson Associates, pay in many divisions at Wall Street firms is expected to drop by double digits in 2016 due to low interest rates, a difficult trading environment, shrinking IPO volumes, and increased regulatory costs.
Johnson Associates Study
Based on business activity during the first three months of 2016, a recent Johnson Associates study reveals that incentive pay on Wall Street is likely to fall by double digits during the year – the first time since the financial crisis where almost every division on Wall Street could post lower bonus levels. The 2016 outlook follows a year in which Wall Street added jobs for the first time in five years and when the bonus pool increased 3 percent.
As you can see from the table below, incentive compensation at investment banks is expected to fall between 5% and 20% — depending on which division of the bank you work in. The greatest drops (-15% to -20%) are expected in underwriting and fixed-income trading which have been plagued by lower IPO volumes and weak credit markets.
The only area on Wall Street that is expected to see modest pay gains is in the more stable retail and commercial banking divisions which should see flat to +5% increases in incentive compensation due to solid deposit and loan growth.
Management at most financial institutions agree that market conditions will only get harder going forward as increased competition, low interest rates, and greater regulatory costs will continue to pressure Wall Street profit margins.
Wall Street 1st Qtr Earnings Calls
This recent study is consistent with earnings reports from many of the largest Wall Street investment banks seen in the past few months.
In its 1st Qtr earnings call last month, Goldman Sachs said that it had cut pay 40% year over year. Compensation went from $4.45 billion in the first quarter of 2015 to $2.66 billion in the first quarter of this year. The only good news from this report is that Goldman limited its staff reductions to only 1% over the same time frame.
Morgan Stanley which also announced its 1st Qtr earnings last month revealed that it had slashed payroll and benefits by 19% to $3.68 billion year over year. Staffing at the bank declined just 2% over the same time period.
In its 1st Qtr 2016 earnings call JPMorgan Chase reported a 5% reduction in overall pay when compared to the 1st Qtr of 2015, and a 14% cut to compensation at its corporate and investment bank during this same period.
Bank of America reported that personnel expenses during the 1st Qtr of 2016 shrunk by nearly 8% on a year over year basis, while head count fell 3 percent during this period.
The Johnson Associates study reflects the fact that the financial struggles seen at many Wall Street investment banks during the 1st Qtr of 2016 has led these firms to tighten their belts – a trend that is not expected to change anytime soon.
In fact, it is highly likely that continued weakness in earnings will lead many of these firms to take the next step beyond reducing bonuses and other incentive compensation, and that is to increase their cuts in staffing levels.
These trends are consistent with our cautious 2016 outlook on hiring and compensation at sell-side research departments and among independent research firms.