Will Wall Street’s hottest traders settle for a mere 30% raise?
Bank traders who saved their firms’ bottom lines in the first half of 2020 are facing a reality of the pandemic: Record revenue won’t mean record bonuses, with most businesses facing declines of 10% or more. Even bond traders are likely to find year-end rewards don’t line up with the cash they generated, as firms face loan losses and pressure on costs.
“If your division hits the ball out of the park for the year — you’re probably better off when that happens in a good year for the overall firm,” said Bonnie Schindler, principal at Compensation Advisory Partners. “Fixed-income traders may feel a bit unlucky having that great performance this year.”
That message has been percolating in recent weeks — visible in fresh projections by Wall Street compensation consultants such as Schindler. They see traders who slogged through years of sedate markets now facing the prospect of having their big payoff tempered by tough times in other parts of the business. Deal advisory and lending operations are struggling. Banks are trying to avoid firings and dividend cuts.
It’s enough to frustrate star traders, leaving them vulnerable to poaching by hedge funds willing to pay more.
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With higher compensation offers and a track record of independence, the No. 1 IBD is “challenging the status quo,” its head recruiter says.
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The unit was awarded a bonus pool that’s 5%-10% larger than last year, reflecting increased profits and assets, people familiar with the matter say.
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‘A Lot of Discontent’
“People who have taken compensation hits over the years are not going to see the increase they’re expecting,” said Michael Karp, CEO of recruiter Options Group, who predicts more defections by managing directors who run teams. “That’s where there will be a lot of discontent.”
Equities traders at major U.S. banks largely succeeded in navigating the most tumultuous markets in a generation as the pandemic triggered lockdowns in March and sent stocks swooning, only to later rebound. But that performance was soon overshadowed by fixed-income trading. Federal Reserve intervention in credit markets helped banks arrange a slew of fundraisings for desperate companies, giving those traders ample chances to buy and sell newly issued bonds.
In the second quarter, traders at three top fixed-income trading houses — JPMorgan Chase, Citigroup and Goldman Sachs — generated about $10 billion in additional revenue. The windfall helped keep JPMorgan and Citigroup profitable despite massive loan-loss provisions.
Fixed-income traders may see their year-end bonuses jump 25% to 30%, according to Alan Johnson, founder of compensation consultant Johnson Associates. Yet those traders are likely to expect increases of 50% or more, he said.
“They’re going to be paid somewhat less than their results on an isolated basis,” Johnson said. “They will be disgruntled.”
Goldman Sachs’s fixed-income trading revenue jumped 83% in the first half of the year. In the second quarter, that unit notched its best haul in nine years while the equity arm had its best showing in 11 years.
Here's how the largest groups have fared during unprecedented market activity.
Yet by early July, billionaire Steve Cohen’s Point72 Asset Management poached Goldman’s repo trading chief, Alex Blanchard, and the head of the bank’s U.S. government bond trading team, Andrew DiMaria.
Traders who jump to hedge funds can pocket compensation more proportional to their outsize profits. While many hedge funds have struggled to outperform the markets this year, some — including Citadel, Balyasny Asset Management and Millennium Management — are widely seen as having the strength to make targeted hires of rainmakers.
Bank traders who shined this year aren’t just helping their desks and company shareholders — they will probably supplement pay for colleagues including investment bankers and saw their work arranging corporate takeovers interrupted as the deadly pandemic shut down commerce, according to consultants.
“Unless business results significantly improve during the balance of the year, 2020 incentive funding will be down, likely double digits for advisory,” Schindler estimated in a recent report.
Fixed-income traders probably should refrain from grousing about helping colleagues. Their own paychecks have been propped up at times with revenue revenue earned by investment bankers during the relatively low volatility of the past decade, according to Johnson. Now, they’re giving back.
“They’ve been paid better over the last half-dozen years than if they had been on their own,” he said. — Additional reporting by Sridhar Natarajan
