Bonuses, the lifeblood of the investment banking business, are down by an average of 50 per cent from last year, and sources say approximately three in 10 employees will receive little or nothing in the way of a holiday sweetener.
But while the unrelenting bear market may have forced Bay Street to trim its staffing levels and slash its annual compensation, it has done remarkably little to thin the ranks of the industry's most exclusive club — those who take home more than a million bucks a year.
When the bonus cheques are handed out this week, about 500 of the Street's top earners — 75 at each of the major banks and as many as 20 at some of the large independent brokerage firms — are expected to top the $1-million mark in yearly pay, according to the projections of several senior financial service consultants.
"A lot of that club would have gotten a lot more than $1-million in previous years," said one consultant, who spoke on condition of anonymity. He said the millionaires club will shrink by 10 to 15 per cent this year, largely due to job cuts at U.S.-owned firms.
Headhunter Joe Kan of Kan & Associates said the investment dealers are "still going through some pain in the way of layoffs and pay cuts.
But to put it all in perspective, you still have a good number of equity professionals taking home half a million in one of the worst markets we've seen in several cycles."
"That's not a bad living if $500,000 is your downside," he said.
What is changing on the Street is the way people get paid. Rather than cut individual bonuses in half, in keeping with the reduction in the size of the overall bonus pool, many dealers are choosing to pay on a sliding scale, which has caused a wide disparity in compensation.
Top performers may get 80 or 90 per cent of the bonuses they received a year ago, while mid-level staffers will get about half. So-called "C" players, if they're lucky, will get to keep their jobs.
"On the institutional side, it's really eat what you kill," said a senior brokerage executive. "I would think it's probably been 10 years since it has been this bad."
"It's one of those all-or-nothing years," added an executive at Toronto-Dominion Bank. "The top performers were paid well, while weak performers were sent a message."
That message might well be that depressed compensation levels are here for good.
"We think it's going to stay down," said Ken Hugessen, a managing director at Mercer Human Resource Consulting, a Toronto firm that works with the banks on executive compensation issues. "It's not going to be too shabby by any standards. But the high-water mark that was made last year or the year before, it may be a long time before you see those levels again."
Mr. Hugessen said there are fears that the lucrative investment banking fees collected during the recent bull market may have disappeared permanently. He added that there is little tolerance among shareholder groups or the public at large for exorbitant investment banker salaries, particularly in light of the well-publicized corporate governance breakdowns in the U.S. market.
Preliminary reports from Wall Street suggest that payouts for investment bankers will also decline by up to 50 per cent this year.
"There's just a widespread . . . ill wind in the sense that the business is not what it once was," Mr. Hugessen said.
Executives at a number of investment dealers and several management consulting and headhunting firms said about 30 per cent of eligible employees on Bay Street didn't get any bonus at all this year. This is a break from what one executive called "the socialist tradition" that sees some sort of bonus awarded to almost everyone, if only to keep professionals around for the coming year.
Such sentiment has vanished because many observers see the Street employing too many investment bankers, with a 10-per-cent reduction in head count expected in 2003.
The bonus pool is down by up to 20 per cent at powerhouse dealers such as RBC Dominion Securities and CIBC World Markets Inc. Both have seen the volumes of traffic in their lucrative merger and acquisition departments drop as corporations on both sides of the border stopped buying and selling companies.
The saving grace for CIBC World Markets was a strong performance in packaging and selling income trusts, the only hot sector of the underwriting market. Strong showings in this area also helped keep the bonus pool relatively flat, year over year, at Scotia Capital Inc.
BMO Nesbitt Burns Inc. and TD Securities Inc. were off slightly, reflecting a drop in underwriting, while National Bank Financial Inc. actually posted an increase in its bonus pool, thanks largely to increased investment banking revenue in the income trusts.
Employee-owned Griffiths McBurney and Partners, an independent dealer, is expected to post a solid year, reflecting a strong showing in mining financing. Payouts are seen as flat at independent firms such as Yorkton Securities Inc. and Canaccord Capital Corp., while employees at Canada's smallest brokerage firms are expected to be getting virtually no bonuses at all.
The anxiety over bonuses is understandable, given that base salaries are relatively modest, and can account for as little as 20 per cent of total compensation packages.
"In a good year, bonuses could be 300 per cent, 350 per cent, 400 per cent," said one former investment banker. "In a bad year, [they are] still six figures. In a really crappy year, maybe nothing or very little."
When it comes to different specialties, the deal-making investment bankers have been hardest hit, with former stars in M&A, technology and telecom seeing their cheques shrink.
Most analysts will see their take-home pay slide, part of the fallout from Wall Street scandals on the links between investment banking revenues and analyst compensation. "Analyst pay seems to be on an unstoppable slide downward," said the head of one dealer.
Added another: "The days of million-dollar analysts are numbered."
© The Globe and Mail
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