New York, NY – According to an article published in this week’s Wall Street Letter, bonuses for U.S. sell-side analyst are expected to plunge by close to 30% from last year’s levels – a development that could prompt some analysts to seek greener pastures on the buy-side. The 2008 drop in analyst bonuses follows a more meager decline of 2% last year.
The expected decline in sell-side research bonuses should not be a surprise given the sharp losses experienced by most investment banks resulting from the credit crisis. In fact, some analysts argue that most employees at investment banks should expect a 20% to 30% drop in bonus levels based solely on falling revenues when compared to last year. NY Governor David Patterson recently commented that state economists’ projections suggest that overall, Wall Street bonuses could fall 30% to 40% this year.
The drop seen in the U.S. is also being felt across the pond. It is interesting to note that in late June 2008, the UK’s Guardian newspaper reported that bonuses at financial services firms in London fell for the first time in 5 years.
Unfortunately, research analysts could be in a more precarious position given the fact that they are often seen as a “cost center” versus a “profit center”. Certainly, in the midst of the recent market tumult, a number of sell-side firms have acceded to this reality by trimming their research staffs. In fact, we would not be surprised to see analyst layoffs from other bulge bracket firms in the months to come as these firms try to manage the dramatic losses they have suffered as a result of the sub-prime mess.
Of course, some sell-side analysts have taken this opportunity to look for work on the buy-side, particularly as hedge funds try to expand their internal research capabilities. However, not everyone is jumping ship to the buy-side. In fact, many sell-side analysts are sitting tight hoping for this storm to pass.
The real question is, “How long will this downturn last?” While we have no data to verify this view, we suspect that sell-side analyst bonuses will remain depressed for the foreseeable future, as long as equity commissions remain weak, and as the health of the investment banking community is in question.