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Big Bonuses, but a Shift in Who Gets the Biggest

Tuesday, 17 Dec 2013 | 6:13 AM ET
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Wall Street's senior executives have been holed up in conference rooms across Manhattan the last couple of weeks, locked in tense all-day sessions. The special project: dividing up this year's spoils as bonus season approaches.

Over the last month or two, headlines have speculated that 2013 will turn out to be an excellent one on Wall Street. By some estimates, bonuses should rise as much as 10 percent across the board, if not more. A survey of bankers in London released over the weekend suggested they expected to receive bonus increases of as much as 44 percent.

By the sound of it, you would think that being a banker on Wall Street once again meant you were a 1980s-style Master of the Universe.

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But you would be wrong. Don't get out your violins, but the truth is that this year isn't going to be nearly as profitable for many of the once prominent bankers who were paid seven and eight figures to advise the world's top chief executives, according to interviews with more than a dozen top Wall Street executives. And if you were a suspender-wearing bond trader, bonuses are going to be minuscule, a product of a nearly impossible bond market this year.

While compensation on Wall Street may be up over all, the total number may hide an uncomfortable reality about the transformation of the finance industry: the old-school advisers to Fortune 500 clients on strategic mergers and acquisitions — made famous by the likes of Felix Rohatyn and the late Bruce Wasserstein — are unlikely to be the big rainmakers anymore.

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They have been eclipsed by hedge funds, asset managers and anyone who has anything to do with initial public offerings. With the stock market up and more money pouring in every day, bonuses will be showered generously on employees connected to that world.

"It's hard for some of my guys to accept, but the money is going to different people this year," a senior executive of a large bank told me about the shift in dollars from strategic adviser to asset managers.

That's not to say that some bankers won't be making eye-popping amounts of money. Indeed, many will — especially those who were at firms in 2008, 2009 and 2010 who were paid in stock. Shares of firms like JPMorgan Chase, despite its well-publicized recent problems, and Goldman Sachs have risen immensely, creating seven- and eight-figure payouts for some executives who are still at the companies.

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But the amount of money being handed out this year, much of it in stock and subject to clawbacks, will be lower for many finance professionals. Goldman, for example, shaved the amount of money it reserved for compensation by about 5 percent for the first nine months of the year. On average, a Goldman employee would receive $319,775. Similarly, JPMorgan scaled back compensation at its investment bank by 4.8 percent. The average employee — which includes secretaries and support staff in that calculation — gets $165,744.

According to Johnson Associates, a compensation consulting firm, big banks set aside $91.44 billion for 2013 bonuses in the first nine months, down from $92.49 billion in the period a year earlier.

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An investment banking managing director might make $850,000, down from at least $1 million a couple of years ago and $2 million to $3 million before that. A vice president is likely to receive about $400,000, compared with $750,000 a couple of years ago.

The average income for a financial professional in New York City last year, according to Thomas P. DiNapoli, the New York State comptroller, was $360,700. It was $401,500 at its high in 2007.

This year may mark the biggest shift in who gets what. After the financial crisis, many top corporate advisers on Wall Street continued to be paid handsomely, even though they weren't bringing in the same kind of revenue that they once did, given the drought in mega-mergers and private equity buyouts. Over the last three years, most of those bankers have kept busy advising corporate clients dealing with shareholder activists, patiently waiting for a return to what's known in the merger business as "elephant hunting season."

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But unlike advising on a big merger, in which a multimillion-dollar fee is a rounding error for a corporation in the middle of a billion-dollar transaction, fees for advising on activist situations can be tiny, and in some cases are done gratis as a relationship-builder in hopes of scoring an even bigger fee later.

With the once highflying merger business in decline, at least for now, banks are trying to figure out what to do with a staff that often looks bigger than it should be relative to the revenue they bring in. In some cases, banks have shrunk adviser departments, while most appear more likely to keep employees but pay them less.

"There's an awakening that's happening," said another senior banker, who was not authorized to speak publicly. "Many of us went into this business in the late 1980s or early 1990s when it was the coolest job in the world. Now being a hedge fund manager or out in Silicon Valley is where the real money is being made."

That awareness is reflected in the graduating class of Harvard Business School. Last year, 27 percent of the graduating class entered the finance industry, down from 35 percent the previous year. In 2008, 40 percent of the graduating class went into finance. That may be a good trend line given the overemphasis of Wall Street in the overall economy and the resulting brain drain in so many other industries.

Where are they going?

For the most part, the biggest swing has been into technology. Eighteen percent went into high technology last year, compared with only 12 percent the previous year.

It seems like Harvard Business School's graduating class knows how to follow the money.

By CNBC anchor and New York Times writer Andrew Ross Sorkin

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