Industry experts expect that year-end incentive compensation will drop by double digits for many financial services professionals after a year of challenging market conditions.
Johnson Associates, a compensation consulting firm, estimates in a new report that year-end bonuses and equity awards for asset management professionals will fall by 20 to 25 percent due to declining revenue and shrinking assets under management.
The December cutbacks may be sobering for some in the industry, especially for newer entrants who have yet to work through a down market cycle. But year-end compensation is typically formulaic, based on incentives set ahead of time, meaning finance professionals shouldn’t be caught off guard by the pay drop.
According to Chris Connors, vice president at Johnson Associates, this year is unique due to declines in both equities and fixed income.
“There’s kind of a double whammy in that the equities markets are down significantly, but also the fixed income market is down significantly,” he said by phone Monday. “That in tandem is hard on the long-only strategies.”
Johnson Associates estimates compensation changes based on its public and proprietary data, according to Connors. Investment bankers who work on underwriting will likely have it hardest this year, with bonus compensation falling by 40 to 45 percent year over year.
Their colleagues working on the advisory side of investment banks will see compensation fall by 15 to 20 percent, as will staff at equities-focused hedge funds. Johnson predicts that private equity employees will see a decline of 5 to 15 percent, depending on the size of the firm.
“There’s obviously been pressure on fundraising; valuations for portfolio companies are down,” Connors said. “That cocktail of what’s going on in the macro environment has hurt portfolio valuations at PE shops and venture capital in general.”
But according to Sloan Klein, who runs the eponymous career management consulting and talent development firm SloanKlein Associates, some investors will still take home big checks next month.
For instance, she noted that “a lot of middle market firms are having a good year,” which translates into better year-end bonuses. The same goes for some credit managers in the hedge fund space.
According to the Johnson Associates’ data, macro hedge fund employees and sales and trading workers at fixed income managers could see a year-over-year improvement in bonus pay of 15 to 20 percent.
“These are hard times, but the traders are making money because now we’ve got volatility,” said recruiter Charles Skorina by phone. “Good traders make money.”
Looking ahead to 2023, Johnson Associates expects that firms will actually increase salaries. “We’re seeing salary pools increasing by 4 to 5 percent for next year, which is even higher than the 3 percent historical norms as firms kind of look to battle inflation,” Connors said.
In the meantime, Klein said finance professionals who see a decline in bonus compensation should make sure they understand why. For the buy-side employees whom Klein advises, long-term incentives — separate from the formulaic bonus compensation analyzed by Johnson Associates — can also decline due to employee performance or other qualitative measures.
“You want to make sure that you understand that it’s about portfolio and firm performance as opposed to your own performance,” Klein said. “For some, those two are closely connected.”
She also shared advice for future negotiations: Ask about how a year-end decline in compensation — whether driven by personal or firm-wide performance — will affect future pay.
“I think people who have been in the business for longer have the ability to understand that these cycles come and go,” Klein said. “The question about future comp is the important one. Even though your compensation may be down this year, it’s cyclical. It’s really about understanding how it might affect the future.”