Bonuses matter a lot in the financial world, and private equity is no exception to that rule. Recently, Thomas DiNapoli, New York State Comptroller, indicated “trends suggest that total cash bonus pool for work performed in 2012 is likely to decline for the second consecutive year (although it is still too early to predict by how much because personal income tax withholding data will not be available until early 2013).”
What’s been happening with financial industry wages and withholding in recent years? Well, the best indicator is total wages in the financial industry in New York State. Here’s what it looks like.
As is shown, pay follows a cyclical pattern, with bonuses typically showing up in the first quarter of the year following the year for which a performance is paid (blue peaks, orange lows). Bonuses peaked in 2006, the height of the recent financial boom, with total wages for the first quarter of 2007 coming in at $54 billion, of which an estimated $35 billion stemmed from bonuses paid out for 2006 performance.
Following the first quarter of 2007 peak, bonuses declined by about two percent into 2008, with total bonus pay coming in at an estimated $34 billion. Following the slight decline from Q1 2007 to Q1 2008, total financial industry pay declined by an historical record of $19 billion in 2009, of which an estimated $18 billion was due to decreased bonuses. Since bottoming out in 2009, bonus pay has recovered somewhat, with a recent peak of about $22 billion in the first quarter of 2011 (2010 performance pay).
What concerns most financials professionals is not necessarily the smaller than expected bonus pay, but rather the recent trend in bonus pay. Since recovering from its 2009 low to a 2011 peak, bonus pay is trending downwards for likely the second consecutive year – bonus pay declined by about $5 billion from Q1 2011 to Q1 2012, and is expected to decline further to perhaps as low as $14 or $15 billion for the first quarter of 2013. The trend is shown graphically in the following graph.
What does all this mean for the average banker? Well, with a compressed wage structure, it means that to stand out from the crowd, you’ve got to be better than just above average, you’ve got to be quite good.
The figures also likely include some effect from the not-yet-completely-implemented Dodd-Frank Wall Street Reform and Consumer Protection Act, which, in conjunction with the Federal Reserve’s implementation of Basel III, are likely putting pretty strong downward pressure on financial industry employment and wages.
How is the overall financial industry condition going to affect the industry of interest – private equity? Well, in looking at trends in employment and wages, the two rarely move out of step for a very long time. If private equity continues to outperform, as is expected, top performing individuals from other sectors of the financial industry will move in. So, private equity professionals can have a little bit of schadenfreude at the inability of competing financial sectors to match its performance, but only a little.
Overall, bonus payments for 2012 performance are expected to come in lower than the previous fiscal year, marking the second consecutive year of decline in bonus pay.
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