Every year since the 2008 crisis, investment bankers at many of the large global banks have seen less and less of their bonuses in up-front cash and more in deferred stock and staggered cash payouts pushed out to two to three years down the road. During the 2011 bonus season, banks including Morgan Stanley, Barclays plc and Deutsche Bank AG have employed even stricter deferral policies, reportedly enacting up-front cash caps on bonuses of $125,000, £65,000 ($103,000) and $265,000, respectively.
It's not entirely clear whether these comp changes and others like them will mitigate risk, as they were intended to do. But what is clear is that these policies will make hiring efforts more costly for banks and could grind job movement on Wall Street to a halt.
"I would expect to see a dramatic decrease in lateral recruiting and movement this year," says Russ Gerson, CEO of New York financial services recruiter the Gerson Group. After trending downward for the past few years, job movement this year is going to be "very, very limited," he says. "It's very hard to justify large buying-out packages."
Indeed, the more compensation is deferred, the more hiring banks have to pay to unshackle bankers from their current employers. And with profit margins getting slimmer, hiring banks may not have the resources or inclination to buy out large, unpaid, deferred compensation packages.
The result: The percentage of investment bankers voluntarily switching jobs this year will fall to 5% to 7%, predicts Shekhar Purohit, managing director at compensation consultancy Pearl Meyer & Partners LLC. That's down from about 10% in the years following the financial crisis and 20% in the mid-2000s.
Missing from the landscape this year are the "one or two firms that are aggressive hirers that drive the lateral recruitment process," Gerson says. In 2011, Jefferies & Co. played that role in terms of compensation and guarantees, followed by RBC Capital Markets Corp., Citigroup Inc., Wells Fargo & Co. and Evercore Partners Inc. In 2010, Nomura Holdings Inc. and Jefferies led the charge, followed by Bank of Montreal and boutiques including Moelis & Co. and Evercore Partners Inc. "This year, there are no firms actively recruiting," Gerson says.
Still, a handful of bankers will change jobs on Wall Street this year. A bank trying to lure a "very significant high-impact rainmaker" to its ranks may be willing to buy out a recruit's deferred compensation package, Gerson says. And one large move could set off a chain reaction of others as a firm that loses a top dealmaker snaps up a replacement and so on and so on. "People are braced for that first move," says Rebecca Glasman, a partner with New York search firm CTPartners.
In other cases, bankers may choose to move to a new firm even if that means leaving some of their deferred comp behind. "Certainly, there are folks that may be leaving money on the table if the right opportunity comes along," says Kevin Petrasic, partner in the global banking and payment systems practice of Paul Hastings LLP. Daniel Ryan, partner in charge of the New York office and sector leader of investment banking at Chicago recruiting firm Heidrick & Struggles International Inc., concurs. "If bankers want to make a move, they are going to have to come to the realization that all of their deferred compensation may not be bought out anymore," he says.
But bankers could have other reasons to change employers, including expectations of better long-term growth or fears that deferral levels can escalate even more. So they might be willing to leave some of their deferred comp behind. "Senior bankers are looking to the future. They are saying, 'If I don't leave now, I may be stuck at a firm that will defer more and more compensation and pay us less,'?" says Gordon Dean, former vice chairman of investment banking at Morgan Stanley and co-founder of newly launched San Francisco- and New York-based boutique Dean Bradley Osborne LLC. "You don't have to make people whole as you used to because they see more of a long-term upside" to joining an independent firm that isn't hampered by heavy regulation.
Some banks may employ creative structures to make new hires whole. One plan being bandied about involves an employer's reimbursing a new hire's deferred compensation package based on the banker's ability to reach pre-established revenue metrics, Ryan says.
In some cases, hiring banks are offering up-front cash bonus payments to buy out deferred compensation packages. However, they tend to discount these up-front signing bonuses by 10% to 20%, "based on what the deferred package is worth to the banker," says Purohit.
For the most part, hiring banks usually try to mirror a previous employer's vesting schedule when reimbursing a new recruit's deferred bonus, says Alan Johnson of New York-based compensation consultancy Johnson Associates Inc.
For bankers who have grown frustrated with pay caps and increasing levels of deferred compensation, boutiques and independent banks that are not under regulatory pressure to restructure compensation remain an option. Other bankers are eyeing the corporate development path, says Glasman. While in-house corporate development roles may not necessarily pay as much as investment banking -- even during tough times on Wall Street -- the reduced hours and lifestyle improvement may be enough to attract bankers.
Purohit says an increasing number of bankers are considering consulting positions within the corporate advisory practices of large accounting firms. These businesses provide M&A advisory services similar to investment banks' with "less exposure and liability" due to their consulting fee models. The upside may not be as great as that offered by investment banking, where fees are based on the size of the deal, but there may be less of a downside when large deals are few.
Will there be a mass exodus of disenchanted bankers to other industries and toward early retirement? Maybe not. But "bankers are going to self-select out. There is less economic upside; we will see lots of people leave the industry," says a recruiter requesting anonymity. "It's harder to make money."