Wall Street bonuses could plunge 40% this year. An industry consultant lays out 5 ways firms can get creative on comp to keep morale up.

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  • While many industries have seen dramatic reductions in their workforces as a result of the coronavirus pandemic, most of Wall Street is still at work, albeit from home.
  • But the coronavirus pandemic and tough market conditions could still impact Wall Street workers, especially when it comes time for bonus pay.
  • While bankers and investment professionals often rake in six-figure salaries, annual bonuses can far exceed base comp for top performers.
  • Bonus pay on Wall Street could fall by as much as 40%, according to compensation consulting firm Johnson Associates.
  • From getting creative with non-cash bonuses to limiting executive pay, here are some of the things that HR execs on Wall Street could when it comes time to talk compensation.
  • Click here for more BI Prime stories.

The coronavirus pandemic is having a huge impact on the US workforce. Employees across industries including airlines, hotels, restaurants, and retailers have been laid off or furloughed. But while weekly jobless claims have spiked to a record 3.3 million, those who are able to work remotely have been less impacted so far.

Wall Street, for one, is still at work, albeit from home. But employees of banks and investment firms could still feel the impact of the pandemic and the recent economic downturn. A “perfect storm” of the coronavirus pandemic and challenging market conditions could mean a hit to Wall Street employees’ pay, according to Alan Johnson, managing director of compensation consulting firm Johnson Associates.

While bankers and investment professionals often rake in comfortable six-figure salaries, annual bonuses can far exceed base comp for top performers. But those bonuses are tied both to individual performance and a pool determined by how their division or firm itself is doing. 

Overall incentive-based pay, or bonuses, could fall by as much as 30% to 40% this year, according to Johnson. The consulting firm regularly forecasts compensation expectations, and it arrived at this prediction through talking to clients and doing its own analyses, Johnson said. 

“In the [2008] financial crisis, bonuses went down by 50% or more,” Johnson said, “so 30% to 40%, or 35% in the middle of that range, is a significant drop but not as severe as the financial crisis.” 

“But this is a big deal,” said Johnson. 

To be sure, Johnson’s prediction of a fall in bonuses can be attributed to more than the coronavirus pandemic. 

“There’s just less revenue to go around,” Johnson said. Between pressure from clients to lower fees and new, lower-cost products like ETFs gaining in popularity, many financial services firms like asset managers and hedge funds have struggled to find revenue growth.

“There is compression of revenues, and then other things become more expensive,” Johnson said, from technology to developing new products to paying top talent.

“For the generic financial services firm that’s doing a good but not great job, there’s just less money available for compensation, particularly for average people,” Johnson said.

In a recent presentation to the Financial Markets Total Rewards Group, an audience of senior financial services HR professionals, Johnson gave advice to Wall Street firms on how to manage costs and make smart decisions during uncertain times.

From keeping base pay stable and competitive to getting creative with incentive-based pay, here is some key advice Johnson gave Wall Street’s HR execs.

Keep base salaries stable

In the presentation, Johnson cautioned that for financial services firms, now is not the time to reduce base salaries.

“Cutting salaries is usually what companies do when they’re going to go bankrupt,” Johnson said. 

“This is an industry where salaries really aren’t that high,” Johnson said. Base pay usually accounts for a small portion of an employee’s total take-home pay, which typically includes cash and stock bonuses and other compensation.

So cutting base pay likely won’t save a financial institution that much money, Johnson said.

But cutting base pay could have a big impact on morale, Johnson said. And for companies that aren’t approaching bankruptcy, it likely won’t save enough money to be worth the potentially damaging messaging. 

Get creative with incentive pay

Given the challenging economic conditions and the impact of the coronavirus, firms need to consider “out-of-the-box” solutions, Johnson said in the presentation. 

Whether that be deferred compensation that gets paid out over a period of years opting for stock-based compensation as opposed to cash, firms will need to get creative to keep their top talent.

For companies that can’t afford large cash bonuses at the end of this year, they could offer their top performers future payouts to keep them satisfied. 

Regardless of the way firms decide to pay out their top performers, transparency is key, Johnson said. 

Minimize the damage for top performers

As relates to incentive compensation, the first thing firms should do is look at employee performance. 

Now is “not the time for focusing on average performers,” Johnson said in the presentation. And in a scenario where bonus pools are reduced, firms should ensure top performers feel the impact the least.

Avoid drastic action

Wall Street firms should avoid taking premature measures like hiring freezes or immediate changes to equity compensation terms.

Johnson also said that firms should avoid “dumb” mistakes like talking about reducing medical benefits or cutting perks like office snacks to save money.

“Don’t make dumb mistakes,” Johnson said. “If you have a lavish office, why nickel and dime people on the free sodas?”

While cutting these small costs like office perks is one of the first things many companies will do, Johnson cautioned that it’s not ultimately going to save the company enough money to be worth the potential impact on morale. 

“It’s not really going to save any money,” said Johnson, “and what message are you trying to send?”

Beware of the optics

2020 is not the year to award executives large bonus checks, Johnson said. 

There could be regulatory restrictions placed on compensation, and executives need to be mindful of public perception, too.

“It’s going to be very politicized,” said Johnson. “If you’re one of the industries in the crosshairs and you’re laying off thousands of people, this is probably not a great year for senior management pay.” 

“You’re really going to have to be sensitive to the optics,” Johnson said. 

SEE ALSO: Toddler meltdowns and spilled milk. Here’s how Wall Street’s high-flying — now grounded — bankers are working from home.

SEE ALSO: ‘People are freaking out’: 6 wealth managers told us how they’re handling client meltdowns as the markets tank

SEE ALSO: Barclays made $250 million in one day of trading last week as banks raked in money on market volatility

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