Why investment bankers will be depressed next week

There are clouds over Morgan Stanley as bonus payments are deferred.
There are clouds over Morgan Stanley as bonus payments are deferred.
Image: AP Photo/Richard Drew
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Many investment bankers are bracing for depressing news next week when they find out how much their bonuses have shrunk, while some are already deciding to leave because of dramatically reduced total pay.

Because of the interest rate rigging scandal among European banks, some Barclays bankers are preparing for the worst when they receive news about their compensation next week. The bad news possibly includes a large chunk of their bonuses being treated as deferred pay, people familiar with the matter said. That would mean this year’s bonus would likely be paid out over a period of time rather than in a lump sump now. Deutsche Bank’s head of compliance Stephan Leithner said Thursday the total bonus pool for the bank will fall by 11% to $4.3 billion.

(Update 9:30a.m. ET: Barclays chief executive Anthony Jenkins announced today that he won’t take a bonus for 2012, saying that he must “bear an appropriate degree of accountability” for the rate-rigging scandal that has tarnished the company’s reputation. This could be a bad sign for other Barclays bankers, who already have reason to worry that their bonuses will be slashed.)

A few boutique banks and private equity firms said they’ve begun receiving resumes from their investment banking colleagues, including from several managing directors at Goldman Sachs, a place normally known for retaining talent.

Morgan Stanley had the worst news for bankers among financial firms this year. Many investment bankers and traders there are getting 100% deferred compensation, meaning they will get their bonuses in four separate payments through January 2016. As a result, some bankers in key positions are expected to leave, people familiar with the matter said.

Bloomberg reported that Peter Bacon, Morgan Stanley’s head of capital markets in Europe, and Gene Martin, co-head of the leveraged and acquisition finance group, are leaving the bank.

Still, it’s not ugly across the board. At some firms, the higher earners who are seen as valuable employees are retaining their usual bonus of about $5 million to $6 million, people familiar with the matter said. But some bankers who would typically earn about $3 million in bonuses are now receiving about $1 million to $2 million. (Base pay for an experienced investment banker is generally in the ballpark of $400,000, so bonuses represent the bulk of their compensation.)

Given how rich even the reduced payouts still are, it’s hard to shed tears for today’s investment banker.

But for some of them it creates a real financial and lifestyle crunch. They have second homes, several children in private schools, and luxuries they depend on their bonuses to finance. Some worry they will have to make cuts in their way of life because of their shrinking pay.

Above all, many bankers are facing the fact that decreasing compensation is here to stay amid shrinking profits, increased regulations and demand from shareholders for increasing returns. This is a dramatic change in expectations for those who joined the industry looking for Masters of the Universe status and pay.

Last year, Morgan Stanley capped cash bonuses at $125,000. Also in 2012, UBS implemented what’s known as a clawback, taking back a portion of bonuses for some bankers. The move followed a 60% cut in bonuses because of a rogue trading scandal that cost the bank more than $2 billion.

Perhaps the most depressing thing about next week for many bankers will be that they’ll feel just as crummy at bonus time next year.