Most sellside traders at all levels should see their bonuses rise this season.
The caveat, though, is that the composition of those bonuses will change. Stock will make up a greater portion, while cash is expected to diminish. That’s the trend for the foreseeable future, according to a new report on compensation in the global markets by Options Group, a New York-based global executive search and consulting firm.
It’s all part of the new world of compensation that emerged last year in the wake of the near collapse of the financial system. In an effort to discourage reckless risk-taking, firms are restructuring their employees’ pay packages–often with the federal government looking over their shoulders.
The restructuring is happening in two ways. First, the mix of salary and bonus is being weighted toward salary. Second, bonuses are more heavily stock-weighted, with vesting periods of at least three years, the report stated. In addition, many banks’ payments can be "clawed" back if the bank’s overall performance falters during the vesting period.
"Salary increases, deferred cash tranches … and clawbacks," the report stated. "All these new compensation structures will change the way bonus pools are distributed for many years to come."
Equities traders at most first-, second- and third-tier firms can expect bonus increases this season of up to 35 percent from 2008–when their bonuses fell as much as 40 percent from where they were in 2007.
Among cash equities trader salaries and bonuses, managing directors will see the largest estimated year-over-year increase, at 50 percent. Vice-president-level prop traders will see the smallest increase, at an estimated 15 percent. Prop trading, with a few exceptions, did not enjoy a good 2009, said Eric Moskowitz, head of compensation consulting at Options Group.
The breakdown by different positions and levels shows that for equity traders, overall compensation will rise, year-over-year, between 15 and 50 percent.
Director-level sales traders can expect bonuses worth up to $750,000, up 40 percent from last year. Meanwhile, director-level position traders are looking at a bonus worth up to $800,000, which is 40 percent higher than last year’s.
But much more of that bonus will likely be in stock this year. According to Options Group, a senior-level employee is going to get up to 90 percent of his bonus in stock. That’s up from 40 percent two years ago at tier-one banks, when about 60 percent of bonuses were paid to senior-level staffers in cash–at worst the numbers were split 50/50, between cash and stock. The Options Group Intelligence Unit, the research division of Options Group, assembled the figures.
Going forward, the report noted, more of a trader’s total compensation will come from salary. For instance, a managing director at Credit Suisse whose bonus once represented about 83 percent of total compensation–with salary at 17 percent–now will have a bonus that’s 67 percent of total compensation, against 33 percent salary, Options Group data show.
In an example of the compensation breakdown, about 60 percent of the compensation package for Goldman Sachs, Morgan Stanley, Citigroup and JPMorgan Chase consists of monies allocated for bonuses. For 2009, the four firms collectively have almost $41 billion set aside for bonuses through nine months, according to the Options Group.
There’s a reason for the increase in the stock portion. Because of a catastrophic 2008, the federal government’s involvement with the nation’s largest banks–through its Troubled Asset Relief Program–will directly affect executive bonuses. Washington sought to end the long-standing practice whereby executives receive exorbitant cash payment bonuses.
The huge cash bonus structure provided incentives for executives to take short-term risks at the expense of disregarding their bank’s long-term health or financial stability, according to language Kenneth R. Feinberg, special master for TARP executive compensation, used in his October determinations on the compensation packages for the top executives at firms that received exceptional TARP assistance, such as Citi and BofA.
Now firms such as Goldman Sachs are restructuring these large bonus cash payments so that they’ll instead be paid in company stock that must be held over a long-term period. The hope is that this will do more to align executives’ interests with those of shareholders. But the concept of conflating risk and compensation in this way isn’t new.
"Traders say that using risk-adjusted returns is a common practice at hedge funds and investment management firms on the buyside," the Options Group compensation report said. "It makes common sense for this to be standard practice at the big global banks, as well."
Feinberg’s purview extends only to those banks with outstanding TARP loans, according to a Treasury Department spokesperson. The law only directs Feinberg to determine the specific pay packages of the top 25 employees at TARP banks, as well as the pay structures of the next 75, and not the rank and file.
Many of the largest banks–none of which commented for the story–altered their compensation models on their own. At Credit Suisse, for instance, a managing director who saw a $200,000 salary and $1 million bonus will now receive a $400,000 salary and an $800,000 bonus, the Options Group report stated. The bonus will be paid out in three-year tranches of cash and four-year stock vests.
The net effect of changes to bonuses, industry and compensation watchers say, is that a firm’s ability to attract talent will be greatly threatened. One firm, KeyBanc Capital Markets, was part of a company that received TARP funds. Its director of equity trading, Kevin Kruszenski, told attendees at the Security Traders Association’s annual conference in October that success will be difficult until it gets out from underneath its TARP obligations. TARP involvement, he said, is a challenge to morale.
"It is the single biggest worry I have every day, and the thing I lose sleep over every night," Kruszenski said. "Retaining people is all our business is about. We have a partner with the government that is not really too understanding about that."
The federal government’s involvement with large investment banks has already had a negative effect, according to Paul Dorf, a managing director with the compensation consulting firm Compensation Resources Inc., in Upper Saddle River, N.J.
"I think [the federal government] recognizes that some of the things they’ve implemented have caused a brain drain on some of the larger banks and financial institutions," he said.
