Street's Weather: Bonus Showers

NEW YORK -- Wall Street executives are gearing up for a bonus bonanza this year but some of the players who pocketed big payouts in previous years may not be so lucky this time around.

Overall, compensation on Wall Street is expected to go up an average of 20% this year and many executives will see even bigger gains, according to a soon-to-be-released study by New York-based executive search firm Options Group.

Investment bankers, who arrange mergers and stock offerings for corporations and have received a smaller percentage of the bonus pie in recent years, are expected to be among the Street's biggest winners this year, with compensation rising 20% to 25% on average, according to the study.

For an investment banker at the managing director level, a senior post on Wall Street, that will translate into an average pay package of between $2.2 million to $3.3 million this year. A global head of investment banking could pull in on average anywhere between $7 million to $10 million.

The study estimates that bonuses won't be so hot for some in the bond crowd. Traders and others who focus on convertible and junk, or "high yield," bonds are more likely to see their paychecks shrink by about 10% on average as their business wasn't as good in 2005 as in previous years. For a managing director level convertible-bond trader that will translate into a 2004 pay package of $700,000 to $900,000 on average.

Brokerage firms like Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., fueled by an increase in merger-and-acquisition advice and healthy profits in areas like oil trading, are on track to post record profits for the fiscal year ended Nov. 30.

Over the past several weeks top executives at firms across Wall Street have been huddled in meetings dividing up the bonus pie; no small change in a world where about half of all revenue is allocated to compensation and firms often pay out multimillion bonuses to make sure their best talent stays put.

Top traders and bankers on Wall Street typically make a base salary of $100,000 to $250,000 -- the rest comes in the form of a bonus. Most employees will get their bonus number sometime in the first two weeks of December -- with the cash coming early in the New Year. Some have already begun loosening up the purse strings.

"It's white-truffle season and people are paying as much as $180 for a main course," says Julian Niccolini, a managing partner of the New York City's Four Seasons Restaurant, a perennial favorite eatery of Wall Street's power elite. "The economy seems to be going in the right direction and I think this is the most money people have ever had."

Overall, Options Group co-founder Michael Karp estimates total pay packages in the U.S will be up 15% to 20% on average this year over year-ago levels. In Europe, which has benefited from an extremely strong appetite for merger-and-acquisition advice, the news is even better; bonuses will be even better, according to the study. And in Asia, employees of major brokerage firms could see their pay jump 20% to 25% on average as brokerage firms find themselves paying a premium for experienced people.

The firm to watch: Morgan Stanley. The brokerage titan had a number of defections earlier this year in the wake of a power struggle that resulted in the ouster of firm CEO Philip Purcell and is expected to have to pay up in order to keep some top producers from jumping ship, says Glenn Schorr, an analyst who follows the brokerage houses for UBS AG.

Aside from bankers, the year's other big winners are commodities traders, especially those who deal in the energy markets. This group could see compensation rise on average by 30% over 2004. "There was lots of volatility in this area and a lot of people made a lot of money here," Mr. Karp said.

Within investment banking, media and energy bankers, who were particularly busy in 2005, are expected to see the biggest bonus bumps.

Despite all the chatter about the big bonuses bankers will be getting, mergers and acquisitions weren't the main driver of revenue on Wall Street in 2005. For instance, at Goldman Sachs, investment-banking revenue was up just 4% for the nine months ended Aug. 27 compared with double-digit revenue increases in the firm's bond and stock divisions. Still, Mr. Schorr notes, since the banking business is on an upswing firms will have to pay to keep people in their seats.

Mr. Karp adds that portions of the bond market still haven't recovered from earlier this year when General Motors Corp. and Ford Motor Co. debt was downgraded by debt-rating agencies. As a result, he said people who trade things like credit default swaps, will likely receive pay packages that are pretty much flat compared with last year. The after-effects of the downgrade are likely to eat into the profits -- and the pay packages -- generated by Wall Street's fixed-income proprietary traders, according to Options Group.

Proprietary traders trade with the firm's money and are often among the best-paid people on Wall Street. This year the pay packages of fixed-income prop traders will be on average flat to up slightly from last's year's high levels, according to the study. For the global head of fixed-income prop trading at a big firm, that will translate into a pay package in excess of $15 million on average, according to the study.

On the stock side, which includes businesses like wealth management and the sales and trading of products like equity derivatives, Options Group is forecasting payouts will rise on average by 15% to 20% over the previous year. However, some areas, like convertible-bond trading, have been hard hit and won't do as well. Equity prop traders can expect to see an average pay increase of about 20% over 2004.

Across the board, Wall Street's top producers can expect to get more this year has the improved climate as increased the amount of firm poaching. "Why should a proprietary trader stay at a bank when he or she can make a lot more money by going to a hedge fund," Mr. Karp said.