Dive Brief:

• Year-end bonuses for investment banking underwriters could plunge 35% to 40%, compared with 2021 levels, compensation consulting firm Johnson Associates predicted in a report Thursday. 
• The consultancy’s latest projection marks a swift reversal from six months ago, when Johnson predicted investment banking underwriting bonuses would jump 30% to 35% from 2020 to 2021 — the largest pay bump since 2009. 
• Investment banking advisers may see bonuses slump between 15% and 20% this year compared with 2021, and bonuses for asset management bankers are forecasted to decline between 10% and 15%, Johnson Associates said.

Dive Insight:

Bank profits have dwindled after a record-setting year in 2021 that saw torrid activity in mergers and acquisitions and firms boosted earnings by releasing the loan loss provisions they stockpiled earlier in the pandemic. As the initial public offering market cools, investment banking profits are down, which may chip away at bonuses.

At the same time, rampant inflation is curbing how far a dollar will stretch. 

“For the first time in decades, inflation has a significant impact on real compensation outcomes,” according to the report.

The consumer price index rose 8.5% between March 2021 and 2022, and rising interest rates are putting the brakes on corporate deal making. 

The latest figures reported by Johnson represent a dimmer outlook for the year than the firm forecasted in 2021.

“I don’t think [bonuses] are going to up as much next year,” Managing Director Alan Johnson told CNBC in 2021.“But the view is ‘22 will be a really good year.”

After the first quarter of 2022, Johnson’s predictions are far less rosy. As incentives for asset management and investment banking take a nosedive, bonuses in the retail and commercial banking sectors are expected to dip 5%, as soaring inflation hurts consumer spending.

Volatility in the markets, meanwhile, could prove a boon to traders as client activity rises. Equities traders could see bonuses increase between 5% and 10% over 2021 levels, and fixed-income traders could see bonuses rise between 15% and 20%. 

Divergences in bonuses between different business units could create retention challenges in asset management and investment banking, Johnson predicted.

The ongoing Ukraine conflict introduces an additional element of uncertainty to the consultancy’s predictions, as it continues to impact markets.  

In the months ahead, as large banks look to control expenses, Johnson predicts the “war for talent” will come to an end as firms keep headcounts relatively stagnant.

The consultancy predicted 2022 will prove a challenging year for banks "as employers grapple with negative impact from return to office, high inflation, and lower incentives."