Wall Street banks are deflating pay expectations to avoid a replay of last year, when cutbacks on bonuses and increased deferrals surprised bankers and traders.
Almost 20% of employees won't get year-end bonuses, according to Options Group, an executive search company that advises banks on pay.
Those collecting awards may see payouts unchanged from last year or boosted by as much as 10%, compensation consultant Johnson Associates Inc. estimates.
Decisions are being made as banks cut costs and firms such as Nomura Holdings Inc. and UBS AG fire investment bank staff.
Employees were taken aback as companies chopped 2011 bonuses by as much as 30% and capped how much could be paid in cash.
That experience, along with public statements from top executives, low trading volumes in the first half and a dearth of hiring, has employees bracing for another lackluster year, consultants and recruiters said.
"HAPPY TO HAVE A JOB'
“A lot of senior managers won't have to pay up, because they're saying, "Where are these guys going to go?'” said Michael Karp, chief executive of Options Group.
“We're in an environment where a lot of people are just happy to have a job,” he said. “Expectations have been managed so low that people will be happy with what they get.”
More-modest expectations reflect a new reality, as total pay is about half what it was in 2007, Options Group said in a report last month.
Firms are struggling to earn the returns that shareholders demand amid higher capital requirements, a proprietary-trading ban, and lower deal and trading volumes. Of the 10 largest global capital markets firms, the only one trading above book value is UBS, which eclipsed that mark after pledging last month to shrink its investment bank by half.
The Goldman Sachs Group Inc. and the investment bank divisions of Credit Suisse Group AG, Deutsche Bank AG, JPMorgan Chase & Co., Morgan Stanley and UBS set aside a total of $37.9 billion for pay in the first nine months of the year, down 7% from a year earlier, according to data compiled by Bloomberg.
Those firms have cut more than 9,000 jobs in the past year.
The compensation figures include money allocated for paying salaries and bonuses, as well as costs from deferred bonuses coming due.
Low expectations this year have been driven in part by a lack of companies willing to poach non-star traders as banks exit some capital markets businesses, Mr. Karp said.
UBS said last month that it is winding down much of its fixed-income trading and cutting as many as 10,000 jobs.
The Royal Bank of Scotland Group PLC said this year it was exiting most merger advisory and equities trading.
The impact on morale and the amount of grumbling following decisions about 2011 compensation also have led firms to take a more active role tamping down expectations for employees, said Rose Marie Orens, a senior partner at Compensation Advisory Partners LLC.
“It'll never be a non-event, but if you can take the surprise out and allow people to say, "Yeah, that's within 5% of what I expected,' it becomes less distracting,” said Robert Dicks, a principal at Deloitte Consulting LLP who focuses on compensation and benefits. “It means less hallway chatter and ultimately more productivity.”
James Gorman, chief executive of Morgan Stanley, said in a Financial Times interview published last month that banks need to cut staff and compensation, as “the industry is still overpaid.”
Still, almost half of Wall Street employees expect a bonus increase this year, according to a survey of 911 employed financial professionals conducted between Sept. 26 and Oct. 3 by job search website eFinancialCareers.com.
A smaller number, 27%, said that bonuses will rise in the next three years, while 31% see no change and 42% anticipate declines.
There have been signs of optimism in recent weeks, as the nine largest global investment banks reported a 38% jump in third-quarter trading revenue from a year earlier, according to data compiled by Bloomberg.
Companies also may start adding positions they had been waiting to fill until after the U.S. elections, providing some competitive pressure on pay, said Paul Sorbera, president of Alliance Consulting, a search firm.
“Firms haven't been doing anything for a few years, and you have some pent-up demand,” he said. “Management is guiding people low because they don't know yet, and people are expecting it to be like last year, so there could be a surprise to the upside, though it won't be a big one.”