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January 30, 2008

Equities Traders Take a Hit in Compensation

By John Hintze

Wall Street mortgage bond desks aren't doing trading pros in cash equities and equity derivatives any favors this bonus season.

In the wake of this summer's credit crunch and lingering liquidity troubles, all eyes on the Street are firmly focused on this year's bonuses.

And the verdict? One headhunter is upbeat. Another, not so. "Equity cash and equity derivatives salespersons, traders and structurers are set to earn 10 percent to 15 percent more on average in bonuses than they did in 2006," reports New York-based Options Group in a recent global survey.

And that increase is on top of last year's record setting distributions. But that rosy picture isn't true across the board-at least not in New York. There, trading pros in equities and equity derivatives should expect a haircut of between 5 and 10 percent from last year's record take-home, says Eric Moskowitz, head of the compensation consulting practice at Options Group.

Indeed, credit losses at brokerage firms are the culprit for smaller bonuses this year at the big houses, Moskowitz says. However, the New Yorkers' European colleagues should expect to see a jump in their bonuses from 10 to 15 percent this year. Asian traders should see a slightly larger increase of between 15 and 20 percent.

The credit losses stem from the massive write downs taken by most of the big banks that were prompted by the summer's collapse of the sub prime mortgage industry, and more recently, the evaporation of liquidity in even the high rated debt markets.

Peter Smith, client partner at Korn Ferry, is less optimistic, saying banks' fixed income losses are going to make it "very difficult to pay people accordingly."

Smith says equity-related bonuses at the "better houses," including those in Europe and Asia will be up just five percent from last year. Yet, executives with strong ties to hedge funds and other asset mangers should fare well, he says. For at least one trading house, expectations are high. Lehman Brothers announced record net revenues and income for 2007. They were driven by its equities business and expansion overseas. However, Lehman's expected larger bonus pool must be divvied up among a larger group. It has a 10 percent staff increase.

All the firms are likely to increase the stock-payout portions of their bonuses to as much as 75 percent, up from the typical 50 percent, recruiters say. Those payouts typically vest over three years.

One lesson for equity pros this year may be to consider trading overseas.

"There are big equity derivatives hubs in places like Singapore and Korea," says Moskowitz, adding, "There's global opportunity there for equity derivatives. Traders should think about that."

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