Bankers face modest end-of-year bonus cuts this year but big pain ahead

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Bay Street bankers who were bracing for big cuts in year-end bonuses can expect some reprieve from their disappointment, but the respite will likely be brief.

Despite a dramatic decline in deal flow and market volatility, compensation experts say a tight labor market and strong merger and acquisition activity in the mining and energy sectors have offset the need to cut the size of annual payouts in early December.

While expected to be vastly smaller than the huge bonuses paid out amid the trading frenzy in 2021, the tougher cuts that bankers fear are more likely to come next year, especially if Canada’s economy slips into recession.

“The guidance that senior managers are giving investment bankers in their teams is that this was still a good year and they can still expect a very decent year-end number,” said Adam Dean, founder of financial services recruiting firm Dean Executive Search. . “To others on the street, it can be surprising.”

For large banks in particular, Mr. Dean said, a “leveling off” occurs between different subsectors. Teams that have done particularly well in any given year – and by 2022 will include mining, energy and infrastructure – will help fund bonuses for teams operating in under-performing subsectors. This year, one such subsector will be tech.

“There is an ongoing constant,” he says, “though [staff working in] Certain sectors that had outsized performance in margins will be paid a higher premium.”

Bill Vlad, chief executive of Toronto-based executive search firm Vlad & Co., said another factor keeping compensation “higher than what production numbers would otherwise indicate” is the proliferation of new investment products such as mutual funds, exchanges, and more diversification. Traded funds and alternative funds are available.

“There’s so much product expansion on the buying side that you have to get those people from somewhere,” he said. “Just the basic supply-demand situation is generally going to keep compensation high at investment banks, because you can’t get these guys out of the easy-bake oven.”

According to Mr. Vlad, banks are still struggling to meet hiring targets, especially for mid-level positions that require five to 10 years of experience. That means keeping bonuses down by any significant amount among junior staff can have an adverse effect on retention.

“Because talent is still in demand at that junior level, you can’t go and say, ‘Hey we’re going to cut your salary by 20 percent and try to hire 20 percent more people at the same time. ‘It’s just not working,” Mr Vlad said.

“Very few people can reap the bonus at the junior level [and] If they do, I’ll be standing outside the elevator with a table full of Tim Hortons offering free coffee and a new job.”

Another reason year-end bonuses are expected to be lucrative is that, despite annual payments, banks typically set aside a certain amount each quarter for what is referred to as “variable” or “incentive” compensation. Because much of the slowdown in market activity occurred in the final quarter of the bank’s fiscal year, the results of which will be announced next week, only a fraction of total bonus payments to employees will be affected.

The bank published the date to confirm it. For the first nine months of their current fiscal year, Canada’s Big Six banks have set aside nearly as much money for bonuses as in the same period in 2021, and in some cases much more.

Canadian Imperial Bank of Commerce allocated $1.862-billion to variable compensation in the first three quarters of 2022, which was $133-million more than the amount allocated in the same nine-month period in 2021. Toronto-Dominion Bank set aside $2.5-billion in the first three quarters of 2021, or $177-million more than the same period a year ago.

Collectively, Canada’s six biggest banks earmarked $14.59-billion in bonuses in the first three quarters of this year. That’s about the same as the $14.56-billion set for the same period in 2021.

The increase appears to be even more dramatic than pre-pandemic levels. In total, Canada’s Big Six paid out more than $19-billion in variable compensation in 2021, representing an increase of more than 22 percent from the $15.6-billion they collectively paid in 2019.

“The situation looks worse now than in the earlier part of the year,” said Hei Wai Kwan, a partner in the financial services practice at executive search firm Odgers Berndtson. “Perhaps, for the current year’s cash bonus, perhaps [the banks] Will try to protect it as much as possible.”

Next year, however, is when ballooning bonus levels are expected to taper off.

“Various financial services firms have expressed concern about the expected level of activity over the next 12 to 24 months, particularly on the M&A front,” Mr Dean said. “It’s going to be a tough climate in which to do business.”

Ms. Kwan said the recent spate of bonus cuts by major U.S. financial institutions paints a grim picture of what’s to come in Canada.

“The United States tends to move very quickly on these things, and Canadian banks are subject to the same headwinds,” he said. That means “with Canadian banks, the impact is much more to come.”

In a report released Nov. 15, New York-based consulting firm Johnson Associates projected “a sharp year-end decline in incentive compensation across financial services” in the U.S. after the third quarter.

According to analysis by Odgers Berndtson, bonuses for US bankers on the retail and commercial sides of the business are down roughly 10 percent this year while investment bankers and wealth managers will see their bonuses drop by 15 percent to 25 percent.

“And if you’re talking about capital markets, I think they’re going to see some pretty steep declines this year,” Ms Kwan said. “So I think people [in Canada] Looking at those cross-border comparisons and their own economic realities.”

Bonuses will fall next year and beyond as bankers struggle to achieve the metrics needed to justify big year-end payouts, said Travis O’Rourke, president of recruiting agency Hayes Canada.

Bonuses in 2023 will more fully reflect the impact of the recession in 2022, Mr O’Rourke said. “Everyone knows that 2023 and 2024 are going to be somewhat challenging, but no one gives up. [bankers] Fewer targets bound to their variables [compensation]Assuming a recession is coming.”

“For the banks, this is going to be an opportunity to save money,” he said. “If people hit numbers, they hit numbers and they’ll get paid, but there’s an understanding across all sectors that those numbers probably won’t be hit.”

Bankers face modest end-of-year bonus cuts this year but big pain ahead

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