The difficult business environment for financial services and competition within the industry, as well as market activity, interest rates and ongoing uncertainty in world markets, are likely to drive bonuses lower this year across both the sell side and the buy side, although the latter won’t be hit as hard as the former.
While the markets have recently regained stability, underlying business issues are hampering firms’ performance and global uncertainty weighs on the outlook for banks and asset managers, leading to a downward trend in compensation in 2016, according to Johnson Associates’ 2016 Second-Quarter Trends and Projected Year-end Compensation Estimates report on the financial services industry. Brexit has created additional uncertainty, potential future rising costs and revenue pressure, but those ill effects are being felt more significantly in the UK and Europe than in the U.S.
The report predicts lower incentive compensation across financial services sectors, although asset management bonuses are expected to decrease only modestly this year. Johnson Associates expects major investment and commercial banking firms’ revenue to decrease across the majority of their business segments, negatively impacting bonuses more significantly.
Gloomy bonus outlook
On the sell side, 2016 bonuses for firm management and staff position, investment banking advisory, sales and trading roles are all projected to sink by as much as 15%, while investment banking underwriting bonuses are expected to decrease by 25% or more, according to the report. Industry-wide completed activity was lower in Q2, causing equity underwriting nosedive, while advisory and debt underwriting revenue was down moderately.
On the buy side, hedge fund bonuses are the most volatile, with a reduction of as much as 15% looming, whereas private equity firms’ and high-net-worth managers’ and advisers’ incentive compensation only expected to drop by 5%.
Over the longer terms, asset management bonuses, buoyed by rising private equity incentives, have increased since 2009, whereas investment and commercial banks’ incentive pools have decreased, albeit less precipitously over the past five years compared to the 2009-2011 period.
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Source: Johnson Associates
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