Incentive compensation, or bonuses, within the financial services industry are on track to be up this year, but should decline in 2019, according to independent financial services consulting firm Johnson Associates. The table below presents the expected range of incentive compensation increases from 2017 to 2018 for various broad job categories, based on combined cash and long term equity grants. Johnson cautions that these ranges represent what they expect to be the average for each category, and that there is likely to be significant differences between firms and between specific jobs and specialties within a given firm.

Financial Industry Bonuses Rising In 2018 vs. 2017

Financial Job Category Bottom of Increase Range Top of Increase Range
Equities 15% 20%
Private Equity 5% 10%
Firm Management/Staff 5% 10%
Underwriting 5% 10%
Asset Management 5% 5%
High Net Worth 5% 5%
Hedge Funds 0% 5%
Retail & Commercial Banks 0% 5%
Fixed Income 0% 5%
Advisory (-5%) 0%

Source: Johnson Associates

What It Means

These projected changes are significant because incentive compensation tend to be a significant portion of total employee compensation in many of these firms, and in many financial industry job categories, as well as significant share of total expenses for these firms.  For example, based on a sample of nine asset management and related firms and seven investment banking and commercial banking firms, Johnson projects that incentive compensation in 2018 will equal about 35% of net revenues for the former and about 38% for the latter.

For individuals working at asset management and related firms, bonuses are estimated to equal about 48% of one's pre-tax, pre-incentive income. For individuals working at investment and commercial banks, that figure is 52%. 

Among asset and wealth management firms, Johnson notes that slowing revenues and difficult global markets present obstacles to creating value. With hedge funds, they see continued consolidation and pessimism. In private equity and real estate, they find "strong fund raising and realizations," while "economies of scale increasingly dominate."

Despite the focus given to incentive bonuses and total compensation by the industry, Johnson indicates that base salaries are "underappreciated," yet remain a matter of concern to "almost every professional." They also observe that the actual change in bonuses from year to year within a firm can be influenced by matters such as changes in job titles, promotions, new hires, and replacement hires. Looking at specific job categories, they note that "financial service firms have often been caught flat-footed by core technology competitors," and thus "excellent technologists" are in demand and very well-paid.

Looking Ahead

For 2019, Johnson predicts a wave of layoffs and downsizings in the first quarter, accompanied by increased automation. Overall, they expect total compensation to fall by about 5%, despite the fact that they also anticipate base salary increases in the range of 4% to 5%. They foresee greater individual accountability in hedge funds.

Across all segments of the industry, they expect increased focus on setting long-term incentives based on the correct metrics and which induce the correct behaviors. Regarding the traditional dichotomy between "front office" and "back office" staff, the report sees a growing realization within the industry that key members of the latter group are also "value creators" rather than simply costs. Longer term, Johnson forecast that the industry will reduce its over-concentration in higher cost cities such as New York, utilizing "more aggressive strategies to reduce costly locations."