(Bloomberg) -- Bonus season is looking grim on Wall Street, with year-end incentive pools expected to drop sharply across the finance industry amid a pullback in mergers and acquisitions, persistent inflation and the threat of a potential recession.
Bankers advising on M&A are likely to see their bonuses decline as much as 20% this year, while their counterparts in underwriting will probably have the largest drop, with their incentive pay plunging as much as a 45%, according to a closely watched report from compensation consultant Johnson Associates Inc. released Tuesday.
“It’s a cyclical business, and it fell off of a cliff this year,” Alan Johnson, managing director of Johnson Associates, said in an interview. “There will be a lot of unhappy people by the end of the year.”
At the five biggest Wall Street firms, investment-banking revenue fell more than 45% in the first nine months of 2022 from a year earlier. Inflation, fears of a recession and global tensions including the ongoing war in Ukraine have spurred wild market swings that kept dealmaking, including initial public offerings, mostly muted. The battle for talent has slowed in the finance sector, with some firms indicating cuts to compensation and staffing as tools for managing expenses.
“We’ve gone from red-hot labor markets to a cool-down to layoffs,” Johnson said.
There are some bright spots ahead, with base salaries expected to increase 4% to 5% for a second straight year, according to the Johnson Associates report. But for public companies, pain in the stock market could negatively impact compensation, with equity prices falling below original grant values.
The same market tumult that’s hurt dealmakers has been good for equity and debt traders. As a result, equity traders are likely to see their incentive payments stay the same while their fixed-income colleagues are set to get a 15% to 20% increase.
“Overall, that business will continue to be the star,” Johnson said of fixed-income trading, while those in equity underwriting and M&A bankers are likely to be disappointed by their end-of-year compensation. “They should see it coming, but deniability is always strong.”
Elsewhere in finance, bonuses are likely to be lower. Those working in asset management may see a decline of 25%, while incentive pay for wealth managers is poised to drop of 15% to 20%, Johnson Associates said.
The largest private equity firms probably will cut incentive pay by 5% to 10%, while those working at smaller firms may see a 15% decline. Hedge funds focused on equities are likely to cut bonuses as much as 20%, while those with macro strategies are expected to outperform and boost incentive pay as much as 20%.
“It will be surprising end of the year for most,” Johnson said. “They thought things would be better. They had job offers, pay raises and patted themselves on the back repeatedly. Now it doesn’t feel so good.”