Bankers in New York are bracing for year-end bonuses that could be between 30 to 50 percent lower compared to last year – and Elon Musk’s Twitter takeover is partly to blame.
Financiers will face disappointment when their compensation awards land in the first quarter, and thousands more of their colleagues could be laid off after hundreds were let go this year, according to recruiters and compensation experts.
One of the reasons for shrinking bonuses is that several major investment banks, such as Morgan Stanley, Bank of America, and Barclays, have about $13 billion of debt on their balance sheets that was used to fund the $44 billion acquisition of Twitter by Elon Musk earlier this year.
This type of debt, which is used to finance buyouts, has reportedly become scarce in the market, leading banks to keep the debt on their balance sheets rather than selling it to investors, claim the New York Times.
Annual bonuses are expected to be down as much as 50 percent this year, as investment banks deal with declining revenues
Several major investment banks, such as Morgan Stanley, Bank of America, and Barclays, have about $13 billion of debt on their balance sheets that was used to fund the $44 billion acquisition of Twitter by Elon Musk earlier this year, leading to a smaller bonus pool
This can make it more difficult for banks to engage in new lending, particularly if the value of the debt decreases due to declining performance or financial instability at the company being acquired.
Musk has stated publicly how Twitter has been on a ‘fast lane’ to bankruptcy making for a smaller bonus pool at many banks.
Last year, the industry handed out the biggest awards since 2006 as the economy roared back from the pandemic, but this year, the pace of mergers and acquisitions and stock offerings dramatically slowed as debt financing markets collapsed and stock market volatility.
The outlook for a recession also increased as the year progressed with the Federal Reserve aggressively raising interest rates to tackle inflation, cooling economic activity.
For US managing directors at Goldman Sachs, leaner times will probably translate to a 40 to 45 percent decline in average compensation for 2022.
Goldman Sachs began a round of job cuts in September, targeting about 500 people as its third-quarter profit slumped 44%. Morgan Stanley is laying off about 2 percent of its global work force as deal-making grinds to a halt. Left: Goldman Sachs CEO David Solomon. Right: Morgan Stanley CEO James Gorman
David Solomon, the chief executive of Goldman Sachs, told executives to brace for a steep drop in bonuses, a possible recession and slowdown in banking activity that may last until the middle of 2023.
Investment banking revenue in the US is believed to have fallen more than 50 percent from 2021 to nearly $35 billion through mid-December.
Last year was one of the busiest for deals and also the most lucrative for investment banking revenue in over a decade.
Last year, banks generated nearly $71 billion in US investment banking revenue, according to Dealogic, a financial analysis firm.
Over at Morgan Stanley, average pay for senior bankers is forecast to slide 35 to 40 percent. It is a head-spinning reversal for dealmakers who racked up record profits for their firms last year and clinched eye-watering payouts for themselves.
”Flat’ is once again the new ‘up’ this year, with most people just hoping not to see a significant cut in their compensation given how revenues for the industry as a whole have fallen,’ said Stephane Rambosson, London-based cofounder of Vici Advisory, which specializes in hiring senior investment bankers.
Last year, banks generated nearly $71 billion in US investment banking revenue, according to Dealogic. Investment banking revenue in the United States is expected to have dropped more than 50 percent from last year
At JPMorgan Chase the average total compensation for US managing directors is forecast to drop 35 to 40 percent, and pay for senior bankers at Citigroup Inc and Bank of America Corp will probably shrink by about 35 and 30 percent respectively, according to Sheffield Haworth a recruitment firm for top executives.
While the estimates reflect averages, payouts can vary widely depending on individual and group performance.
Managing directors at Wall Street banks typically earn salaries of $350,000 to $600,000 a year, with bonuses of one or two times their base pay. For top performers, incentive compensation can soar to millions of dollars.
The pay slump coincides with a decline in global equity underwriting of 66 percent, or $517 billion in deal value, value of mergers and acquisitions sank 37 percent to $3.66 trillion by December 20, after hitting an all-time high of $5.9 trillion last year, the data showed.
Last year, the average Wall Street bonus was $257,500 – the highest since 2008
The KBW Bank Index, which tracks major US bank stocks, has slumped about 26 percent this year.
The slowdown comes as the US Federal Reserve and other central banks raise interest rates aggressively to tame inflation, moves that have curtailed economic activity.
Other risks including economic uncertainty spurred by the war in Ukraine, tense US-China relations and snarled supply chains fueled volatility in certain markets.
Traders in fixed income, currencies and commodities performed better than their investment banking colleagues. Compensation for FICC traders will probably rise slightly or stay flat while stock traders could see a small drop.
Worsening economic conditions have already prompted firms including Morgan Stanley and Citigroup, to trim their workforces.
After an initial round of layoffs this year, Goldman Sachs is planning to cut thousands of employees in the new year to navigate a difficult environment.