Outlook for Salaries Overview: As noted in our compensation overview, compensation packages within the financial services industry tend to be rather more lucrative than for comparable jobs within other industries. In light of the 2007-08 industry crisis, the outlook for salaries and other compensation is bound to be influenced by several factors.
Impact of Layoffs: Heavy layoffs within the financial services industry are likely to create a buyers' market in the war for talent, where the buyers are the hiring firms. With surplus financial industry professionals looking for work, the outlook for salaries, bonuses and other components of pay packages will reflect severe downward pressure.
Impact of Profit Restatements: The 2007-08 financial industry crisis has been marked by large restatements of financial reports, retroactively turning profits into significant losses. Meanwhile, the financial services industry is noteworthy for paying out a large percentage of profits as employee bonuses. Financial firms that have restated profits downward thus have paid out bonuses that are, in retrospect, excessive. Going forward, this experience is likely to bring restraint to future bonus payouts.
Impact of Buyouts and Bailouts: The 2007-08 financial industry crisis has pushed several leading Wall Street firms into forced mergers with major banks, which are culturally averse to the large payouts of profit that employees of the former have come to expect. Additionally, where federal bailout money has been involved, there will be heavy political pressure not only to decrease CEO compensation, but also that of other highly-compensated employees.
Overall Impact: It is thus highly likely that, in light of all the above:
- Bonuses will be a much lower percentage of profits in the future.
- Incentive plans may penalize excessive risk-taking.
- Bonuses for a given year will be paid out in installments.
- Bonus installments will be reduced or eliminated if profits are restated downwards.
Impact of Public Outcry Over Bonuses: In May 2009, some financial services firms began responding to the political flak over bonuses by significantly raising the base pay of senior executives. Morgan Stanley is the first to do so, with increases of over 100% for certain key personnel. Speculation is that its thousands of managing directors also will enjoy substantial salary increases. UBS is another leading firm that is going in this direction.
These actions mirror the events of 1993. Then Congress, at the urging of the Clinton administration, raised tax rates and limited the tax deductibility of executive pay in excess of $1 million. This resulted in an explosion in stock option awards, which were not covered by the legislation. Stock options have since drawn a lot of criticism. Now the political heat placed on bonus awards may be ratcheting up fixed employee compensation costs, which will have the undesirable effect (from shareholders' perspectives, at least) of making it tougher to cut them when profits are down, apart from making employment even more cyclical in the industry.
Career Opportunities: The outlook for salaries likely will be dampened by a comprehensive rethinking and restructuring of compensation plans. Financial services firms thus are likely to offer enhanced career opportunities in:
- Risk Management
- Human Resources
