Outlook 2016: Bye Bye Bonus

Buyside compensation for 2014 was flat to just slightly higher than 2013 levels, falling short of market expectations for increases in the range of 5 to 10 percent.

The once-heady days of receiving a king-of-the-world compensation package in February for the previous years performance are becoming a thing of the past, like three-martini lunches and endless expense accounts. According to a report from Greenwich Associates and Johnson Associates, compensation growth for the buyside in 2015 was expected to be stagnant compared to 2014.

In their report Say Goodbye to Buy-Side Boom Times, the firms wrote that across the industry, compensation levels were expected to decrease by 5 percent in 2015. The uptick in market volatility will likely result in wider differentials in pay due to variations in incentive compensation pools. This would represent a dramatic shift for an industry that had, until recently, experienced strong asset growth and a steady demand for talent.

Asset managers are facing difficult decisions about budgets, said Kevin Kozlowski, an analyst from Greenwich Associates. And the outlook for the coming year looks just as dim. 2016 will be a much tougher slog for managers-especially the biggest firms, he added.

Just look at the numbers. Buyside compensation for 2014 was flat to just slightly higher than 2013 levels, falling short of market expectations for increases in the range of 5 to 10 percent.

For U.S. equity portfolio managers, total average annual compensation was fairly flat from 2013 to 2014, with peaks of $690,000. Mix of pay was also essentially unchanged over the past 12 months, with an average of $460,000, or 65 percent, taking the form of bonus and the remaining 35 percent as salary.

The rising state of the bond desk saw U.S. fixed-income portfolio managers compensation hold steady from year to year at levels not seen since 2005. Their total annual pay averaged $504,000 in 2014, with almost 60 percent coming from year-end bonuses.

On the trading desks, U.S. buyside bond traders annual compensation increased again to approximately $325,000 in 2014, with slightly more than half of 2014 pay from bonus. Also on the U.S. buyside, head equity traders saw a steady appreciation in compensation from 2011 to 2014. Equity traders have seen a modest decrease in compensation since 2012.

Portfolio managers and buyside traders have been paid well during the good times, with many professionals experiencing several years of steady compensation increases, said Francine McKenzie, a managing director at Johnson Associates. As performance lags and asset growth slows, we do not expect firms to alter compensation structures to deliver increases or even maintain current levels.

Two major investment firms can kiss maintaining current levels goodbye. Credit Suisse Group revealed that it would slash bonuses by as much as 60 percent in 2015 due to losses. This dire measure is the consequence of rules from the Swiss Financial Market Supervisory Authority, which requires financial institutions to cut bonuses in the event of financial loss. Meanwhile, Deutsche Bank announced plans to cut its investment bank bonus pool by as much as $566 million, nearly one-third, as management raced to cut costs.

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