Ferragamo belt-buckles are being tightened across Wall Street as bankers prepare for a gloomy bonus season. Year-end payouts, typically an outsized part of total financial industry compensation, are expected to plunge as merger and acquisitions dry up, inflation persists and recession threats grow.
What's happening: Bankers who help consolidate companies could see their bonuses fall by about 20% this year while those who help companies raise new capital could see that paycheck drop by 45%, according to a new report from compensation consultancy Johnson Associates. Those numbers are adjusted for inflation.
"This year is abnormally bad," said Alan Johnson, managing director of Johnson Associates. "I think there will be a fair number of unhappy people. Some people will look for other jobs... But there will be layoffs, too."
The report, which is compiled through an analysis of economic data and consultation with the largest banks and hedge funds, found that hiring is expected to slow significantly and that layoffs will begin as the threat of recession increases the pressure on employers to cut costs.
Why it matters: While bankers may be put out by the news, others may feel some schadenfreude. An early-career salary in the industry comes in at around $200,000 pre-bonus, after all. But Johnson says you should be concerned by the news even if you don't work in finance.
Some people may think brokers make too much from home sales, he said, but they still want houses to sell because that's good for their community, said Johnson. The same is true of bankers, he added.
Dealmaking is typically indicative of a healthy economic environment.
"This is a canary in the coalmine for the economy, if the canary dies that's not good for anybody," said Johnson.
A larger problem: M&A deal volume slowed significantly in 2022 as dealmakers contended with rising interest rates and a possible recession.
Global M&A volume was $642 billion in the third quarter, according to Refinitiv. That's a 42% drop from the prior quarter and the lowest volume for that period in a decade.
The M&A market is a leading economic indicator, said Morris DeFeo, chair of the Corporate Department at Herrick, Feinstein LLP, a law firm that specializes in M&A. "I think a lot of the slowdown [in M&A] was in anticipation of a [shaky] economy."
What's next: Lackluster performance bonuses could end up kicking banking activity back into gear, said DeFeo. "There are a lot of people who are very motivated by incentives on both the financing side and the strategic side to see things move forward," he said. "We're not going to sit back and wait to see where things go. That's not the nature of our financial business community."
Still, it's unclear whether the industry can overcome market trends like the higher cost of borrowing. While analysts expect a slight rebound in 2023 — they still expect banking activity to remain relatively weak.
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