It has been a profitable year for Wall Street banks. It may be particularly profitable for their bankers and traders.
Wall Street bonuses should rise 5 percent to 10 percent for a third straight year, according to a survey released Tuesday by compensation consultant Johnson Associates Inc.
Banks have benefited from increased merger activity, growth in prime brokerages as hedge funds proliferate, and a surge in trading profits despite a slow second quarter.
“Third quarter is typically the weakest quarter of the year, but this year it was an anomaly and was perhaps the strongest,” said Andrew Roost, a Johnson Associates vice president, in an interview. “It helped solidify the year.”
Merrill Lynch analyst Guy Moszkowski estimates that Wall Street compensation will total $32 billion this year. Compensation typically accounts for close to half of revenue.
While salaries for bankers and traders are often in the low- to mid- six figures, bonuses can be several times larger.
A managing director in investment banking can command $2 million or more. Executive search firm Options Group estimates a global mergers chief might this year take home $8 million to $9 million, up 20 percent to 25 percent from 2004.
Banks such as Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. benefited from increases in mergers and energy trading.
Bear Stearns Cos., Morgan Stanley and commercial banks Citigroup Inc. and JPMorgan Chase & Co. also enjoyed investment banking and capital markets gains.
In proprietary trading, “a lot of firms moved up the risk curve, but they made the right bets,” Roost said. “It’s as though many Wall Street banks’ proprietary trading units turned into mini hedge funds.”
Wall Street profit could rise 13 percent this year to $14.4 billion, New York State Comptroller Alan Hevesi has estimated.
Most employees learn their bonuses in the weeks after banks end their fiscal years. Bear, Goldman, Lehman and Morgan Stanley end their fiscal years in November, and Citigroup, JPMorgan and Merrill Lynch end in December.
Gains vary
Some on the Street will fare better than others.
According to Options Group, vice presidents who handle oil and gas mergers may see bonuses rise to $500,000 from $350,000. But bonuses for high-yield and convertible bond traders may fall 10 percent, and be little changed for equity traders.
Johnson said a typical managing director might earn $1.2 million in incentives, up from $1.05 million in 2004, but down from $1.5 million in 2000, when the technology bubble peaked.
Roost said investment banks have grown more cautious on compensation. They recognize that markets change, and want to avoid repeating the tens of thousands of layoffs earlier this decade, when too many employees were chasing too little work.
Some fear that rising interest rates, a resurgence in oil prices or a major terrorist event might curb or stifle economic growth -- and investment banking activity.
“In the late 1990s, recruiting was frenzied, and leverage shifted to many individual professionals from the firms,” Roost said. “Then in 2001 and 2002, we had a sharp decline in business and, for many, compensation. There were lessons learned. Firms are more selective about guarantees, and more cautious about growth.”
Still, he said, “you have to be conscious of what your top competitors are paying, and you may have to subsidize a few people. But the looking ahead is more selective.”
