On a narrow strip of pricey real estate in lower Manhattan, the workers are in a merry mood.
Investment bankers, traders and other Wall Street types are starting to find out how big, or in a few cases how small, their year-end bonuses are, and unlike recent years, when profits were lean and budgets were tight, there’s something to cheer about in 2004.
With the stock market edging higher again and the pace of corporate deal-making strong, compensation experts and recruiters expect this year’s bonus pool for Wall Street firms to be up 10 percent to 15 percent over 2003 levels. That’s decent, but not as impressive as the fat bonuses doled out in the late '90s, compensation experts say.
“Some companies are doing better, and others are doing less well, but on the whole this has been a solid year for Wall Street bonuses,” said Alan Johnson, managing director of the compensation consulting firm Johnson Associates.
More than a salary sweetener
Unlike in other industries, where a yearly bonus is little more than a salary sweetener, on Wall Street it is an important part of a worker’s salary package and it can represent a large chunk of their annual compensation.
Not only are Wall Street’s bonus payments seen as a measure of the health of financial services industry, they can also reflect the strength of the stock market and the overall economy, analysts say. Wall Street bonuses can also have a salutary effect on New York’s economy, pouring millions of dollars into the coffers of retailers and real estate firms.
But while this year’s bonus pool likely reflects a healthy economy, not everyone on Wall Street is likely to be pleased with their cut, notes J. Burke St. John, a senior partner at the recruitment firm Heidrick & Struggles.
Investment bankers are expected to fare best this year, enjoying a healthy 25 percent rise in bonus payouts — the largest increase for any Wall Street group, according to data from Johnson Associates. Retail and commercial bankers will see bonus increases of between and 10 and 15 percent, while fixed-income professionals will see the thinnest envelopes, which will contain bonus increases of between 5 percent and 10 percent.
Such bonuses, it should be noted, can far exceed base salaries. It is not unusual for senior executives at investment banks to earn bonuses that are more than double their base annual salaries, which themselves can average $200,000.
Bonuses are usually decided by committee and they increasingly depend on how well a Wall Street worker’s business group has performed during the year. So while some departments have fared well in 2004, others have not, and the resulting bonus payouts are uneven, reflecting a trend that developed over the last few years.
“In a different era, when every Wall Street firm was growing year over year, bonuses would rise in unison,” St. John said. “But in a post-bubble world, compensation is lower and performance varies from desk to desk and from company to company.”
Another reason for the disparity is that hiring in the financial services sector is flat, analysts say, and so firms have no need to pay to retain talent.
M&A a reason for optimism
Still, with global deal-making on the rise, some on Wall Street see reason for optimism. The past week was the biggest for corporate mergers and acquisitions activity since mid-2000, with global deal-making topping $100 billion.
The deal bonanza is a gold mine for Wall Street and it reflects growing confidence in corporate boardrooms and strengthening balance sheets. Indeed, on Wednesday Wall Street giant Lehman Brothers reported that quarterly earnings beat estimates by a wide margin thanks to a surge in its merger and acquisition business.
Still, many of the M&A deals announced in recent weeks are likely to close in early 2005, says Alan Johnson, and so they will be reflected in bonuses a year from now.
Johnson says that many of his clients, including some of the nation’s largest financial services firms, are worried about the outlook for their business in 2005 and the impact on year-end bonuses next year.
Their concerns include the declining U.S. dollar, which may negatively impact their foreign exchange businesses, the situation in Iraq, a potential negative for consumer sentiment, and a decline in their fixed-income businesses, which many see as inevitable in 2005 as interest rates rise and mortgage activity cools.
“They’re very concerned about the big macroeconomic issues,” Johnson said. “They have done all they can to prepare, but some things are out of their control. Hopefully, the growth in investment banking will offset some of this, but that’s such a small part of the business, it can only do a modest amount to help the situation.”
A good thing for New York
Wall Street bonuses are seen as an important source of revenue for New York City, and the generally accepted notion is when Wall Street does well, it tends to support the city and certain key industries, like real estate and luxury goods retailers.
But the impact of the volatile financial industry on New York’s economy looks to be diminishing, says Greg David, editor of Crain's New York Business, a financial news journal. The financial industry accounts for about 5 percent of the city’s workforce and for about 20 percent of the city’s personal income, he says. And the average salary on the Street is about $160,000 — a wage few other industries in the city pay.
“Wall Street does have an outsized influence on the local economy, but the story for New York this year is its economy is gaining momentum without the help of Wall Street,” David said. Two of the most important parts of New York’s economy — the retail and tourism sectors — are near record levels of employment. And this year the city’s economy will see job growth for the first time since 2000, while employment on Wall Street is flat, he added.
Still, for Manhattan real estate brokers like Christopher Mathieson, a managing partner at JC DeNiro & Associates, Wall Street bonus time is one of the most important times of the year for his industry. It can bring in about 10 percent of his annual business, he notes, adding that if that revenue were lost, it would have a large influence on the cost of apartments in the city.
“Wall Street types love the status that a loft in the city or a penthouse on Park Avenue can bring, and it really moves the market,” said Mathieson. “And we depend on it for our livelihoods.”