Wall Street Bonus Watch

Jesse Eisinger emails to say that he's hopeful about winning our bonus bet, in the wake of stories today in the WSJ and the NYT. Both of them report on projections from executive-compensation experts Options Group and Johnson Associates, and the overall picture is mixed:

Johnson & Associates predicted that bonuses would be down 5 to 15 percent for fixed-income traders; up 5 and 20 percent, respectively, for equity and equity derivative traders; and up 10 to 20 percent for investment bankers. Bonuses for corporate staff members, according to Mr. Johnson, will be flat to 5 percent up, and asset management will be getting increases of 5 to 10 percent. The Options Group predicted that fixed-income bonuses would fall 15 to 20 percent, and that equity and investment banking bonuses would rise 10 percent.

Note that bonuses in the commodities sector aren't even mentioned here; those are going to be up sharply. I'm still confident I'm going to win the bet: if corporate staff are seeing their bonuses flat to up a little, and if headcount is higher now than it was last year, then it's hard to see how bonuses in aggregate could be down more than 10%.

Now the one big unknown here is whether Wall Street is going to make good on its implicit promise to its employees. As a rule, financial professionals work very hard all year, in the hope and expectation that if they make a lot of money for their firm, a substantial chunk of those profits will be returned to them in the form of a bonus check. In other words, from an employee's point of view, a bonus is a reward for a job well done.

From an employer's point of view, however, the bonus is a way to retain talent and to ensure that the top producers remain at the firm for another bumper year. So if a certain business performed very well in 2007 but looks as though it will have a dreadful 2008, the firm has no real reason to pay out big bonuses. The employees who made lots of money for the bank in 2007 will get very annoyed and leave for greener pastures (ie, hedge funds), but that might be just what the bank wanted in any case: lower payroll in 2008, and no hit to earnings from paying out aggressive 2007 bonuses either.

That said, investment banks have reputations to protect, and a bait-and-switch like that is the kind of thing that Wall Street remembers: anybody trying it risks having a lot of difficulty attracting talent next time the good times are rolling.

And there's one more reason I'm optimistic about winning the bet: it's denominated in those increasingly-worthless things called dollars. Investment banks operating internationally – which is all of them – are going to find that their bucks don't have nearly as much bang as they used to. Which means they'll need to shell out more of them to keep their international employees happy – something crucially important, when it's those international employees who are probably going to drive growth in 2008.