Wall Street and Big Tech brace for much lower bonuses this year

Good morning,

The tech industry and Wall Street beefed up bonuses last year to keep employees during an especially tight labor market. But, this year, that trend may see a huge reversal.

At Twitter, based on Q2 performance, the 2022 total bonus pool is now tracking to 50%, the company said. Twitter reported a net loss of $270 million, or 35 cents per share. This is down from a profit of $65.6 million, or 8 cents per share, a year earlier. The company’s adjusted 8-cent loss is far short of consensus estimates of a 14-cent adjusted profit. Revenue in the second quarter totaled $1.18 billion, a decrease of 1% year over year. Twitter said its bonus pool is calculated based on its performance against annual, board-approved revenue and profitability goals. Twitter CFO Ned Segal’s warning to staff about typical bonuses potentially being decreased was first reported by the New York Times on Friday.

When it comes to the potential for a decline in bonuses this year, “it’s more visible in tech, in particular, and financial services,” Alan Johnson of the compensation consultancy Johnson Associates, told me. Both industries are coming off last year’s historic highs in bonuses, Johnson says.

‘It’s a volatile business’

Johnson Associates’ August report projected that after the second quarter we would see a year-end decrease in incentive compensation across financial services. Investment banking underwriters will most likely see a decrease in bonuses by as much as 45%, according to the report. Meanwhile, asset management professionals and corporate staff might see a decline of 15% to 20%. Depending on the size of their firm, private equity professionals might receive up to a 10% bonus cut.

“It’s a volatile business,” Johnson explains. “Some of those did terrific in 2021. But the revenues have just gone off the cliff in terms of, for example, M&A or underwriting. Bonuses were “abnormally high in 2021; and this year, it’s going to be abnormally low,” he says. The firm calculated the projected year-end incentives on a headcount-adjusted basis based on publicly available data and direct conversations with clients, Johnson says.

I asked him when financial services companies typically conclude they have to start cutting back on bonuses. It varies, he says. “As you get into August and September, you’ve got a pretty good idea how the year is looking,” Johnson explains. “Usually right after Labor Day, firms will very aggressively start to think about how big the aggregate pools might be, and also begin to pencil what [bonuses] would be for individuals.”

Are there areas where bonuses will go up? “Fixed income has benefited significantly from the volatility in the market,” Johnson says. “So, bond traders would be the leading candidate to go up,” he says. “They will go up, but probably much less than they would have if the results of other areas have been better.”

Are layoffs in financial services on the horizon? “Unfortunately, I think so,” Johnson says. “I think most firms feel they’re a little overstaffed. They’ve already started to restrain their recruiting, and they’re going to look at voluntary turnover. But if that doesn’t get them to the numbers they’re looking for, they’re certainly going to have layoffs. By February or March of next year, I think most firms want to be at what they perceive as their right headcount and composition.”

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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This story was originally featured on Fortune.com

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