The luxury travel bookings will be more subdued this year, as will the purchases of $200,000 Aston Martins and vacation homes. Splurges on expensive bottles of wine and jewelry will be less spontaneous. For many bankers, it might not be the most wonderful time of the year.
Annual bonuses — one of the most hotly anticipated numbers on Wall Street — are expected to be down as much as 50 percent this year, as investment banks grapple with declining revenues following a sharp drop in their main businesses of lending, mergers and acquisitions advisory and initial public offerings. With a possible recession in the offing, next year might not look much better.
In a recent management committee meeting, David Solomon, the chief executive of Goldman Sachs, told executives to brace for a steep drop in bonuses, a possible recession and a continued slowdown in banking activity that could last through at least the second half of 2023, according to a person with knowledge of the meeting.
The two top executives at Jefferies Group, another investment bank, warned employees to expect a drop in pay. “This is going to be a more difficult compensation season at Jefferies, just like it will be for every firm in our industry,” the bank’s chief executive, Richard Handler, and president, Brian Friedman, wrote in a memo.
They implored employees to think about compensation over a longer time horizon rather than compare it with a year ago. They wrote that 2021 “was the type of year that comes along very rarely in a finance professional’s career.” It was more appropriate to compare this year’s bonuses to 2019, they wrote.
Bonuses have long been part of the attraction to working on Wall Street. Getting a big one is affirmation of good performance, while a smaller one could be a signal to look for a job elsewhere. One former senior banker at a major bank, who was not authorized to speak publicly on behalf of his former employer, recalled that he would call each banker in his group to a conference room with opaque glass windows to deliver the bonus number. That way, colleagues wouldn’t see a banker’s exuberance or disappointment.
Base salaries for senior bankers can range from hundreds of thousands to millions of dollars, while their bonuses can be double or triple their base. The median household U.S. income, by comparison, was $70,784 last year.
But bonus pools — or the total amount of money earmarked for bonuses at investment banks like Goldman Sachs and Morgan Stanley — rise and shrink with economic activity, meaning that even top performers can take home a smaller amount in a bad year.
And 2022 has not been a good year. The bread-and-butter business of investment banks — mergers and acquisitions, initial public offerings and lending — has taken a beating as rising interest rates and fears of a recession prevented many companies from making bold moves.
Investment banking revenue in the United States is expected to have dropped more than 50 percent from last year, to nearly $35 billion through mid-December, according to the data provider Dealogic. It’s a sharp contrast to 2021, one of the busiest years for deals and the most lucrative for investment banking revenue in more than a decade. Last year, banks generated nearly $71 billion in U.S. investment banking revenue, according to Dealogic.
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In October, the food delivery company Instacart pulled plans for an initial public offering amid market turmoil, and cut its valuation from $40 billion to $24 billion. The business of taking special purpose acquisition companies public, which had brought banks billions of dollars in fees in recent years, also petered out.
Over the summer, efforts by JPMorgan Chase to sell Worldpay, a payments processing unit of Fidelity National Information Services, to private equity firms fell through, according to two people with knowledge of the matter. The potential buyers, which would have had to borrow billions of dollars from banks to fund their purchase, balked at the asking price of at least $30 billion, the people said.
Many of the big investment banks, including Morgan Stanley, Bank of America and Barclays, are also holding roughly $13 billion of debt on their balance sheets — money they lent to Elon Musk to fund his $44 billion acquisition of Twitter, one of the technology industry’s most high-profile deals of 2022.
Normally, banks would turn around and sell that debt to investors. But the market for the kind of loans used to finance buyouts has all but dried up, forcing many banks to keep them on their balance sheets. That makes new lending more difficult for banks, especially because they might have to write down the value of that debt as Twitter sheds advertisers and Mr. Musk warns that the company has been on a “fast lane” to bankruptcy. And that means a smaller bonus pool at many banks.
Few analysts or bankers expect a sharp rebound in investment banking revenue in 2023, so cutting bonuses is a key way for banks to rein in costs, especially because compensation is one of Wall Street’s biggest expenses — and bonuses account for a large portion of it.
“Wall Street always says it has variable expenses to go with variable revenues,” said Mike Mayo, a longtime banking analyst at Wells Fargo. “It’s time to prove it.”
The bonus pool at some of Wall Street’s largest banks — Goldman, JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Barclays — is expected to drop 30 to 50 percent from last year.
Annual bonuses fund all kinds of splurges and big-ticket purchases.
Juan Fernandez, a former sales trader at Goldman Sachs who runs a luxury travel firm in Westchester, N.Y., is already seeing signs of the bonus slowdown among his clients who typically make travel plans months or even a year out.
This time last year his clients, more than half of whom work on Wall Street, were willing to pay high prices at luxury resorts with “no questions asked,” Mr. Fernandez said. This year, he added, clients are still booking travel but have become more price sensitive.
Rich Geremia, a sales manager at the Aston Martin dealership in Greenwich, Conn., said potential buyers this year have been slower to buy the luxury cars, which sell for several hundred thousand dollars. Last year, by contrast, was the quickest sales cycle he had seen in more than 20 years in the business, he said.
Chief executives at Wall Street banks will be walking a fine line this year as they seek to cut bonuses while also trying to retain top bankers who can bring in business.
The best performers are likely to see smaller declines from last year’s bonuses, more in the range of 10 percent, according to banking industry representatives. A large number of bankers will see their bonuses decrease by up to 80 percent. Some might get no bonus at all, which could push employees to leave and limit the number of layoffs banks are planning for next year.
Goldman Sachs is preparing for possible cuts of up to 4,000 employees, or nearly 10 percent of its global staff, which could come in the first quarter of 2023, according to a person familiar with the bank’s plans. The person cautioned that the plans remain in flux.
At the same time, banks continue to worry about the fierce fight for younger talent — which could come at a cost for more senior bankers. At Bank of America, bonuses for associates are expected to be roughly flat, while the average bonus for managing directors in equity capital markets and leveraged finance could be down as much as 50 percent, two people briefed on the matter said.
Since few are expecting a near-term rebound, senior management and human resources teams are likely to spend the first few months of 2023 analyzing whether the bonus cuts were enough to reduce costs or whether they will need to lay off more people.
“Wall Street C.E.O.s have to balance profitability with growth,” Mr. Mayo said. “We’re not modeling boom times ahead.”