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Intuitively, one typically assumes that a bonus is meant as a reward for the past year’s performance. However, experience has taught us quite differently. While past year’s performance is certainly a determining factor, just as much weight (if not more) is placed on a company’s ability to keep an employee from leaving during the upcoming year, without ever “overspending” on a bonus. Said differently, if the competition is not paying bonuses, what is the incentive for your firm to pay one? During times like these, we often hear the “cringeworthy” refrain, that merely having a job in 2020 / 2021 should be a bonus unto itself, which of course is no consolation to those that work incredibly hard only receive the disappointing news at year end.
In a conventional year, 3 major factors usually determine bonus decisions. Industry / Firm performance, Department performance and Individual performance. In our sector, 2020 has added an additional wrinkle, in that as whole, financial services seems to have outperformed significant portions of our economy by significant margins. Additionally, sectors within the Financial Services world have shown greatly disparate results (by sector, function & asset class).
Through the mid-point of the year and early stages of the COVID-19 pandemic, the markets were down significantly, but several months of rebound activity has placed earnings on target or beyond for year-end numbers. BUT will this reflect in comparable bonus numbers?
Almost 2/3 of companies that we surveyed reported that they will be paying bonuses for 2020 although most anecdotal information indicates that throughout the financial services arena bonuses will in fact be down. Many senior leaders have already begun bracing their teams for flat to smaller bonuses for the year. We hope to have more empirical data to share with you in early 2021 as part of our annual compensation review (usually presented every March).
Let’s take a closer look at some of the factors.
One element to consider is that certain sectors within Financial Services had a great year, while others had an abysmal year. This disparity (unseen to these levels in several years) has caused dramatic differences in performance even within the same firm. For example, the largest diversified financial firms have mostly had very strong years across their Investment Banking platforms, but overall firm performance continues to be dragged down by sagging revenues in traditional commercial and retail banking businesses. (These areas can expect to have the steepest decline of bonuses in Financial Services). While the Investment Banking groups will still get paid, their bonus pools will be significantly shrunken to offset the losses in those underperforming groups.
Similarly, within the alternative investment sector (asset management, hedge funds, and private equity), overall incentives are expected to decline. This can be partially attributed to some of the ongoing volatility in the global economy, and uncertainty in the US markets especially around many traditional core investment strategies including hospitality, travel, real estate, retail, and oil & gas. Firms with broad investment mandates will be forced to hold back bonuses in some areas to offset the loss or projected revenue declines in others.
One area that we anticipate bonus increases for 2020 are professionals engaged in fixed income sales and trading who could see bonus jumps as much as 40% or equity sales and trading that might see increases of ~25%, as the volatility in the markets certainly works to their advantage.
Across the board, weaker financial results and uncertainly will cause a strong focus on cost management and budgetary cuts. Companies also find themselves in the unenviable position of having to save as much as possible for potential operating expenses with such uncertainty on the immediate horizon. Unfortunately, one of the easiest ways to do this is by decreasing bonuses in support functions. Pay increases will most likely follow this same pattern.
Another factor in the bonus equation is that so many financial firms received significant money from government entities in 2020 through furlough programs, loans, and credit guarantees. However, that money came with a cost, in that waiving bonuses and forgoing dividends was an essential part of the equation. Political pressure (and public outcry) on organizations that accepted government financial support also cannot discounted as a factor in the bonus downturn.
In a conventional year, 3 major factors usually determine bonus decisions. Industry / Firm performance, Department performance and Individual performance. In our sector, 2020 has added an additional wrinkle, in that as whole, financial services seems to have outperformed significant portions of our economy by significant margins. Additionally, sectors within the Financial Services world have shown greatly disparate results (by sector, function & asset class).
Through the mid-point of the year and early stages of the COVID-19 pandemic, the markets were down significantly, but several months of rebound activity has placed earnings on target or beyond for year-end numbers. BUT will this reflect in comparable bonus numbers?
Almost 2/3 of companies that we surveyed reported that they will be paying bonuses for 2020 although most anecdotal information indicates that throughout the financial services arena bonuses will in fact be down. Many senior leaders have already begun bracing their teams for flat to smaller bonuses for the year. We hope to have more empirical data to share with you in early 2021 as part of our annual compensation review (usually presented every March).
Let’s take a closer look at some of the factors.
One element to consider is that certain sectors within Financial Services had a great year, while others had an abysmal year. This disparity (unseen to these levels in several years) has caused dramatic differences in performance even within the same firm. For example, the largest diversified financial firms have mostly had very strong years across their Investment Banking platforms, but overall firm performance continues to be dragged down by sagging revenues in traditional commercial and retail banking businesses. (These areas can expect to have the steepest decline of bonuses in Financial Services). While the Investment Banking groups will still get paid, their bonus pools will be significantly shrunken to offset the losses in those underperforming groups.
Similarly, within the alternative investment sector (asset management, hedge funds, and private equity), overall incentives are expected to decline. This can be partially attributed to some of the ongoing volatility in the global economy, and uncertainty in the US markets especially around many traditional core investment strategies including hospitality, travel, real estate, retail, and oil & gas. Firms with broad investment mandates will be forced to hold back bonuses in some areas to offset the loss or projected revenue declines in others.
One area that we anticipate bonus increases for 2020 are professionals engaged in fixed income sales and trading who could see bonus jumps as much as 40% or equity sales and trading that might see increases of ~25%, as the volatility in the markets certainly works to their advantage.
Across the board, weaker financial results and uncertainly will cause a strong focus on cost management and budgetary cuts. Companies also find themselves in the unenviable position of having to save as much as possible for potential operating expenses with such uncertainty on the immediate horizon. Unfortunately, one of the easiest ways to do this is by decreasing bonuses in support functions. Pay increases will most likely follow this same pattern.
Another factor in the bonus equation is that so many financial firms received significant money from government entities in 2020 through furlough programs, loans, and credit guarantees. However, that money came with a cost, in that waiving bonuses and forgoing dividends was an essential part of the equation. Political pressure (and public outcry) on organizations that accepted government financial support also cannot discounted as a factor in the bonus downturn.
Feel free to reach out directly to discuss this topic further as well as any other questions or concerns regarding the current hiring climate. I guarantee that in our call together you will leave with 2 or 3 ideas that will greatly impact your ability to find, attract, and procure the top 10-15% of the candidate pool on a consistent basis.