Wall Street Pay Seen Dropping Broadly This Year

Wall Street pay for 2010 is likely to be down nearly across the board, according to traders, executives, and compensation consultants, as the industry rounds out a choppy year in the markets and dealmaking.

Underwriting and deals enjoyed a renaissance in recent months, with successful offerings like the General Motors IPO and a bevy of mergers. Yet total compensation in investment banking is likely to be down between 4 percent and 10 percent relative to last year, according to the Options Group, a New York executive search firm.

In a recently-updated survey of major investment banks and other financial-services firms, the recruiter predicts that in fixed income, where low yields have dominated recent months, pay will fall 9 percent to 16 percent, and that in equities, they’ll drop 20 percent to 26 percent. Within equities, cash and derivatives trading appear to be the hardest-hit areas, according to the survey.

The biggest declines, however, may be felt by prop traders. Since July, when the Dodd-Frank Act effectively made dedicated prop-trading desks within U.S. banks illegal, many large firms have begun shuttering their internal trading units amid a period where returns have been challenged already.

Early next year, when most firms plan to notify employees of their bonus figures, “I think people are going to be shocked by how bad they are,” said one prop trader at a large bank. Options Group predicts that prop-trading compensation will decline an eye-popping 57 percent to 59 percent.

Coming at a time when returns at many of the large banks are improving and the stock markets have been rallying, the expected downturn in pay may seem counterintuitive.

The S&P 500 has risen more than 12 percent since early September, and annual profits for most of the major Wall Street firms are expected to rise significantly, according to analyst estimates. But trading volume has been thin, investors have avoided many complex derivatives and packaged securities, and sagging interest rates have compromised the yields on many fixed-income investments.

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