Credit Fallout Could Affect Bonuses

Compensation experts say the recent credit crunch could cause employee bonuses on Wall Street to drop 5% to 10% from last year.

“With the way markets are going, banks are going to be careful about the way they compensate people,” Michael Karp, chief executive of executive search firm Options Group, told The Wall Street Journal.

When times are good, many bankers and traders receive a bonus five or 10 times their base salary, according to Options Group. Bonuses grew 15%-20% last year and rose 20% in 2005.

Some bankers “have had a wonderful year, but a lot of people have gotten slammed,” said June Gottlieb, a senior managing director at Warburg Realty, a New York real-estate brokerage firm.

Workers in the mortgage industry could see a 30% decline in bonuses this year as a result of this summer’s subprime market fallout, and people in the bond and currency business could see an average decline of 15%-20%, Options Group said.

But not everyone agrees. “The market has clearly softened, but virtually all of the problems are in one or two businesses,” said Alan Johnson, managing director at compensation consulting firm Johnson Associates of New York.

For example, a senior mortgage-backed securities salesman could see an average bonus of $1 million this year, down from about $2 million in 2006.

Firms like Goldman Sachs and Morgan Stanley typically spend half of all of their revenue to pay employees. Revenues are under pressure, but if firms cut back on bonuses too much, employees could leave to pursue more lucrative markets, like hedge funds, commodities, stocks and derivatives.

Many analysts are also predicting this year’s bonus season could include a lot of restricted stocks.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.