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Alternative Investment

Incentive Compensation in Financial Services Projected to Drop in 2022

Compensation consultant Johnson Associates projects a sharp year-end decrease in incentive pay across the financial services sector.

Traditional asset management incentive compensation is down significantly following the drop in both equities and bonds in 2022. Relative to 2021, the firm projects that bonuses will fall approximately 20% to 25% this year.

Pressure on asset management segment is highlighted by a decline in assets under management due to the market sell-off, outflows in active equity strategies, a remarkable level of correlation between the bond and equity markets—both of which are down significantly in the wake of interest rate hikes—and the build-out of alternative and technology platforms.

In the alternative investment sector, private equity and hedge fund incentive compensation fell, as outflows pressured hedge funds, large private equity funds moved down modestly and private equity and venture capital fundraising and dealmaking slowed substantially from a rapid 2021 pace, the firm reports.

Bonuses are expected to drop 15% to 20% in hedge funds, the firm wrote, though this may not be the case for all hedge funds. The outperformance of macro-strategy hedge funds in 2022 led Johnson Associates to predict incentive compensation for macro-strategies will be up 10% to 20% from 2021.

In investment and commercial banking, incentives are down as profits fell from 2021 levels. Drastic declines in valuations have caused a pause in new initial public offerings and caused credit loss provisions to increase. Into 2023, hiring slowdowns and workforce reductions loom, as geopolitical, inflationary, and recessionary risks persist.

Firm management and corporate staff will see their bonuses drop 20% to 30% from 2021, according to the report, due to mixed performances across business lines and lower profits.

In 2022, there is a lone bright spot for incentive compensation: sales and trading, specifically fixed income. Members of this segment can expect to be up 15% to 20% over last year, as market volatility led to higher client activity. 

The biggest change year-over-year in incentive compensation is for underwriters in investment banking, firm management and staff positions, and those in asset management.

“Most Wall Street professionals will be quite disappointed and surprised when they receive their year-end bonuses,” said Alan Johnson, managing director of Johnson Associates, in a statement.

Across financial services, base salaries increased 4% to 5% for the second straight year in 2022 .

Johnson Associates cautioned that an uncertain future environment looms, and the report states, “year-end 2022 compensation decisions should consider two-year timeframes, many firms are reducing hiring plans and some [will conduct] layoffs as business results down and cost cutting pressures mount.”

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Tags: Alan Johnson, Asset Management, compensation, financial services, Hedge Fund, Investment Banking, Johnson Associates, Private Equity, Wall Street Bonuses, Year-End Bonuses

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