Bankers face modest year-end bonus cuts this year but bigger pain ahead

This article first appeared in the Globe and Mail.

Written by Jameson Berkow.

Bay Street bankers who were bracing for major cuts to year-end bonuses can expect some delay to their disappointment, but the respite will likely be brief.

Despite a dramatic drop in deal flow and volatile market conditions, compensation experts say a tight labour market and strong merger and acquisition activity in the mining and energy sectors have offset the need for outsized cuts to annual payments made in early December.

While broadly expected to be lower than the massive bonuses paid out in 2021 amid a frenzy of deal-making, the more draconian cuts that bankers have been fearing are much more likely to come next year, especially if Canada’s economy enters a recession.

“The guidance that senior managers are giving the investment bankers on their teams is that it has still been a good year and they can still expect a very decent year-end number,” said Adam Dean, founder of financial services recruitment firm Dean Executive Search. “To others on the Street, that might be surprising.”

For the big banks in particular, Mr. Dean said there is an “equalization” that occurs among the various subsectors. Teams that did especially well in any given year – and in 2022 those would include mining, energy and infrastructure – help to fund the bonuses for teams working in underperforming subsectors. This year, one such subsector would be tech.

“There is an ongoing sort-of steadiness,” he said, “though [staff working in] certain sectors that had an outsized performance at the margin would get paid that much of a premium.”

Bill Vlaad, chief executive of Toronto-based executive search firm Vlaad and Co., said another factor that is keeping compensation “higher than what the production numbers would otherwise dictate” is the proliferation of new investment products as more varieties of mutual funds, exchange-traded funds and alternative funds become available.

“There is just so much product expansion on the buy side that you need to get those people from somewhere,” he said. “Just the basic supply-demand situation is going to keep compensation higher on the investment banks generally speaking, because you can’t just pull these guys out of an Easy-Bake oven.”

Banks are still struggling to meet recruitment targets particularly for mid-level positions requiring five to 10 years of experience, according to Mr. Vlaad. That means cutting bonuses among junior staffers by any significant amount could have an adverse impact on retention.

“Because there is so much demand for talent still at that junior level, you can’t go and say, ‘hey we are going to cut your pay by 20 per cent and at the same time try and hire 20 per cent more people.’ That is just not going to work,” Mr. Vlaad said.

“Very few people will have the chutzpah to cut bonuses at the junior level [and] if they do, I’ll be standing outside the elevator with a table full of Tim Hortons offering free coffee and a new job.”

Another factor expected to buoy year-end bonuses is that, despite being paid out annually, the banks set aside a certain amount of money for what is usually referred to as “variable” or “incentive” compensation every quarter. Because much of the slowdown in market activity occurred in the final quarter of the banks’ fiscal year, the results of which are due to be reported next week, only a fraction of the total bonus payments to staffers will be affected.

Bank disclosures to date confirm this. For the first nine months of their current fiscal year, Canada’s Big Six banks set aside nearly as much money for bonuses as they did during the same period in 2021 and, in some cases, much more.

Canadian Imperial Bank of Commerce has set aside $1.862-billion for variable compensation during the first three quarters of 2022, which is $133-million more than the amount set aside during the same nine-month period in 2021. Toronto-Dominion Bank has set aside $2.5-billion during the first three quarters of 2021, or $177-million more than the same period one year prior.

Collectively, all six major banks in Canada set aside $14.59-billion for bonuses during the first three quarters of this year. That is almost identical to the $14.56-billion set aside during the same period in 2021.

The increases appear even more dramatic when compared to prepandemic levels. In total, Canada’s Big Six paid out more than $19-billion in variable compensation in 2021, representing growth of more than 22 per cent from the $15.6-billion they paid collectively in 2019.

“The situation is looking worse now than it did in the earlier part of the year,” said Hei Wai Kwan, a partner in the financial services practice of executive search firm Odgers Berndtson. “Chances are, for the current year cash bonus, likely [the banks] will try and protect it as much as possible.”

Next year, however, is when ballooning bonus levels are expected to deflate.

“Different financial services organizations have expressed concern about expected levels of activity over the next 12 to 24 months, in particular on the M&A front,” Mr. Dean said. “It is going to be a tougher climate in which to do business.”

Ms. Kwan said recent across-the-board bonus cuts by major financial institutions in the United States paint a grim picture of what is to come in Canada.

“The U.S. tends to take action on these things very quickly, and the Canadian banks are subject to the same headwinds,” she said. That means “with the Canadian banks, the impact is still to come a lot more.”

In a report published on Nov. 15, New York-based consulting firm Johnson Associates projected “a sharp year-end decrease in incentive compensation across financial services” in the U.S. after the third quarter.

According to Odgers Berndtson’s analysis, bonuses for U.S. bankers on the retail and commercial side of the business are roughly 10 per cent lower this year while investment bankers and asset managers will see their bonuses fall by 15 per cent to 25 per cent.

“And if you’re talking about capital markets, I do think they will be seeing some pretty steep decreases this year,” Ms. Kwan said. “So I think people [in Canada] are looking at that cross-border comparison and their own economic reality.”

Travis O’Rourke, president of recruitment agency Hays Canada, said bonuses will fall next year and beyond as bankers will struggle to achieve the metrics needed to justify large year-end payouts.

Bonuses in 2023 will more fully reflect the impact of the slowdown in 2022, Mr. O’Rourke said. “Everybody knows that 2023 and 2024, to some extent, are going to be challenging, but nobody is going to be providing [bankers] with reduced targets tied to their variable [compensation], assuming a recession is coming.”

“For banks, it is going to be an opportunity to save money,” he said. “If people hit the numbers, they hit the numbers and they’ll get paid, but there is kind of an understanding among all sectors that those numbers are likely not going to be hit.”