As banks get ready to divide up their bonus pool in December or early January, some fixed income traders had better get ready to be disappointed.
According to a third-quarter 2005 compensation and benefits update from New York compensation specialist Johnson Associates, fixed income bonuses will be the same as last year or, at most, 5% up, as fixed income comes off the exceptional year it had in 2004. A report also published in November by Options Group, the “2005 Global Financial Market Overview & Compensation Report”, spells even worse news for fixed income traders.
The global executive search and strategic consulting firm, also in New York, predicts that fixed income traders will be among the biggest losers. In particular, convertible and high-yield bond traders will see their overall compensation (salary and bonus combined) shrink by 10%, as both of these markets have weakened significantly since 2004. “In fixed income, overall compensation is not going to be as high in some areas such as high-yield, although some groups, such as rates traders, are likely to do better,” says Michael Karp, co-founder of Options Group.
Prop trading in fixed income is one area where overall compensation is likely to hold up, but not because prop traders here have had a terrific year, particularly given the Ford and General Motors downgrades and the subsequent impact on the cash and CDS markets, but because banks will want to retain their experienced staff.
Karp says: “It takes a long time to get accustomed to being a fixed income prop trader and you need a lot of stomach for it. Banks are going to want to hang on to their key talent.”
Within fixed income sectors, the bankers most likely to be pleased are traders and structurers of credit derivatives and exotic interest rates and leveraged financiers. The older guard might find their remuneration is under pressure as banks seek to boost the incomes of up and coming talent.
The biggest hikes in compensation will go to those working in hot, growth markets, such as prime brokerage, commodities and M&A businesses. According to the Options Group, M&A bankers will see their total comp go up 20% to 25%. Some fixed income staff could feel this is unjust, given that M&A still accounts for a relatively small chunk of the overall revenue pie at investment banks. According to Johnson Associates, fixed income accounted for 32% of investment banking revenue in the first three quarters of the year, whereas traditional investment banking only made 14%. Morgan Stanley, Lehman and Goldman Sachs are first up.