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Goldman Sachs Traders Won’t Be Alone in Their Bonus Blues

Hold the champagne. It’s the start of bonus season for banks, and the conversations are going to be tricky.

Bankers who work on takeovers or fundraisings were always going to have a miserable time this year, but traders of stocks, bonds, currencies and commodities have been shooting the lights out and must have assumed they’d be landing a nice fat check.

So, the smoke signals emerging from Goldman Sachs Group Inc.’s early discussions will set some eyes nervously twitching across Wall Street: Bloomberg News revealed that the bonus pool for the bank’s global markets division will be a double-digit percentage smaller than for 2021.

This year has been dominated by volatile markets suffering the effects of inflation, interest rate rises and instability. That’s been terrible for advisory work with fees on dealmaking and capital raising down nearly 50% for the big five US banks over the first nine months in 2022 versus the same period the year before. Jefferies Financial Group, not one of the top five, is already warning staff that bonus discussions will be difficult. Job cuts have begun across the industry, particularly in areas that have fallen out of fashion like stock-market listings for the blank-check vehicles known as SPACs.

But trading has been a different story. The same volatility has led investors to constantly reassess their portfolios and reposition their holdings, driving more business through banks’ markets operations. This has lifted total markets revenue for JPMorgan Chase & Co., Goldman Sachs, Morgan Stanley, Bank of America Corp. and Citigroup Inc. — the aforementioned big five — to nearly $90 billion over the nine months of 2022. That’s ahead of $82 billion in the same period last year and $84 billion in 2020.

That led compensation consultants at Johnson Associates to predict bonus increases of up to 20% for traders in fixed income, currencies and commodities (FICC) trading, and high but unchanged payouts for stock traders. The signs of restraint at Goldman have cut against this forecast, especially as its commodities desks, which are much bigger than rivals’, have guaranteed it will produce its best FICC revenue this year in more than a decade.

Goldman Sachs has specific issues that are partly behind its relative parsimony on variable pay: Chief Executive Officer David Solomon’s decision to back away from his passion project of creating a consumer bank was an overdue admission that it had been spending too much for too little progress. Goldman’s losses on this push have eaten into the profits available for shareholders and the bank perhaps needs to make up for some of that from elsewhere.

But traders across Wall Street will get antsy at Goldman’s signals, too, because there are common themes that are likely to emerge in pay. Bank of America and Citigroup may try and hold bonus pools for traders at around last year’s levels in spite of revenue gains, Bloomberg News reports, although both banks and JPMorgan are signaling hefty cuts for other bankers. 

First, 2021 set an unusually high bar for bonuses — which many banks executives sought to make clear to their staff at the time. The industry had enjoyed two boom years fueled by central bank and government largesse in the battle against Covid-19 lockdowns, but pay had been restrained in 2020 when it was still unclear how the pandemic would unfold and any idea of knock-out bonuses during a time of such suffering for so many was rightly discarded.

Along with record revenues in many areas during the pandemic, there was also a hot war for talent with technology companies and private equity firms hoovering up graduates and early-career bankers. By the end of 2021, banks fighting to keep hold of good staff were determined to show as much love as possible in the best way they know how.

That hot war has cooled dramatically and banks are reviving their traditional yearly cull of poor performers either by firing them or through the passive-aggressive delivery of a donut — banker slang for a bonus payment of zilch.

However, there may be a hangover from last year’s battle for talent that is going to affect the bonuses of everyone else. Some of the people banks were most desperate to keep were offered near-term bonus guarantees to stop them from leaving: They’ll be getting that money no matter how they’ve performed this year, meaning there’s less around for others.

But let’s not wail in despair here: There might be more donuts than normal, but many, many people will still be extremely well paid. Executives will likely be telling traders to compare this year’s bonuses to what they got in 2020 rather than in 2021. Do that and many will be looking at a nice chunky increase after all.

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(Updates 8th paragraph with additional details around the “big five” banks’ pay)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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