Optimism on Wall Street Over Size of Bonuses By JENNY ANDERSON Published: November 8, 2005 After several years of being outshone by star traders, investment bankers stand to reap some of the biggest gains in Wall Street bonuses this year. Bonus season on Wall Street is quickly approaching, the time of the year when investment banks determine how big their year-end bonus pools will be and how they will be divided. Economically, the year-end bonus makes up most of a Wall Street professional's compensation. Socially, the bonus - and the real estate, art and NetJets shares purchased with it - determines who will be the year's Masters of the Universe. This season, despite a lackluster stock market, bonuses are forecast to be strong for a third consecutive year. According to a new compensation survey to be released today, the biggest percentage winners for 2005 are expected to be investment bankers who focus on mergers and acquisitions; prime brokers, the professionals who manage a bank's relationship with hedge funds; and proprietary traders, the traders who use their firm's money to bet on the direction of certain market trends. "It's been a solid year, especially in light of rising interest rates and energy prices, the impact of the hurricanes and geopolitical events like the London subway bombings," said Alan Roost, a vice president at Johnson Associates, the New York compensation consulting firm that conducted the survey. Investment bankers are expected to receive increases of 10 percent to 20 percent in their year-end bonuses from a year ago. For a midlevel managing director in investment banking, that could mean total compensation of roughly $1.2 million to $1.8 million for the year. While such gains may not get them back to the go-go years of 1999 and 2000, it gets them much closer. Year-end bonuses for prime brokers, who have been buoyed by the boom in hedge funds, are expected to rise 20 percent, according to the survey. Paychecks for fixed-income traders, those who trade debt - like bonds, credit derivatives and mortgage-backed securities - are expected to be flat to 5 percent higher. Still, coming on top of their already large levels of compensation, such bonuses will leave those traders high on the Street's pecking order. The big winners could be traders involved in commodities and energy, in particular, proprietary traders who deal in those two high-octane growth areas. They could receive pay increases of 40 percent to 50 percent, with some walking away with $15 million to $20 million each, according to one investment banking executive who is prohibited by his firm from commenting on compensation issues. Investment bankers, on the other hand, represent a larger pool of people, so each receives a smaller slice of the pie. While investment banking makes up a smaller and smaller portion of Wall Street's revenue and profits, it continues to be an important business for banks because mergers and acquisitions spur additional business in financing the deals and trading the stocks involved in the deals. "I don't think anyone has caught up to fixed income, but investment banking is catching up," Mr. Roost said. "It's made the largest strides, but fixed income is still on top in terms of total compensation levels." Prime brokers are not traditionally among the highest paid, so their bonus increases this year will be less notable than those for fixed-income proprietary traders. Bonuses can vary widely on Wall Street, based on experience, the performance of the executive's group, the number of deals the executive worked or whether the executive came from another bank with a financial guarantee. The actual amounts will not be known for a number of weeks - many firms will not carve up their bonus pools until after Thanksgiving. Those executives charged with divvying up the bonus pool face an interesting quandary. The third quarter, traditionally Wall Street's weakest, was among the best quarters ever at many firms. Merrill Lynch reported a record $1.4 billion in net earnings, up 49 percent from a year ago, while Lehman Brothers earned $879 million, up 74 percent from a year ago. October, by comparison, was a more challenging month as rising interest rates weighed on the market. Still, a number of factors have blessed Wall Street this year. There has been a frenzy of mergers, spurring financing for all those deals. More than $2.1 trillion worth of global mergers and acquisitions have been announced so far this year, compared with $1.6 trillion for 2004, according to Merrill Lynch. The rise in the number of hedge funds and the amount of money they manage means that Wall Street firms have more consumers of equity and credit derivatives and more customers for financing, as hedge funds typically borrow to leverage their trades. And while rising interest rates may slow corporate financing and challenge fixed-income traders, they offer opportunities to hedge against that rise through credit derivatives. For Goldman Sachs, Lehman Brothers, Bear Stearns and Morgan Stanley "compensation should be a record at $32 billion in 2005 versus $24.7 billion in 2000," said Guy Moszkowski, a securities industry analyst at Merrill Lynch. He said that "2000 was what people thought of as the high-watermark year, but we've surpassed that in terms of revenue and compensation."