Credit crunch to weigh on industry bonuses

BOSTON (Reuters) - Bonus season is going to be a lot gloomier on Wall Street this year as the credit crunch weighs on payouts, bankers said at the Reuters Finance Summit this week.

The bankers also worry that if the mortgage-related losses that have already dented the fixed income and derivatives business at several big banks should spread, a lot of professionals will be looking for new jobs early next year.

"Through June we were thinking this would be a blockbuster year, but now you'll see bonuses under pressure," said James Dunne, chief executive of Sandler O'Neil & Partners, an investment bank that focuses on the financial sector.

Banks like Citigroup Inc (C.N) and Merrill Lynch & Co Inc MER.N recently said they suffered billions of dollars in losses from mortgage-related businesses, which forced their CEOs to resign.

Overall, U.S. bonuses are expected to be flat to down 15 percent this year, compensation experts at Johnson Associates said. In 2006, the group reported an average jump of 10 percent to 15 percent in incentive pay.

U.S. financial professionals, who often count on bonuses to make up a significant portion of their compensation, will suffer most, according to preliminary data from Options Group, which also sees bonuses declining here by 10 percent to 15 percent.

In Europe, the group expects bonuses to shrink by 5 percent to 10 percent while the bonus drop in Asia will be as much as 5 percent.

Banks have traditionally earmarked as much as 50 percent of revenue for compensation and benefits but this year some like Germany's Deutsche Bank (DBKGn.DE) have already said they are putting aside a much smaller pool.

VARYING WIDELY

But payments are also expected to vary widely among U.S. financial professionals.

"Bonus season is going to be tough especially in underwriting and fixed income," said Todd Thomson, former Citigroup chief financial officer and now the founder and CEO of Headwaters Capital, at the Finance Summit.

Johnson Associates reported that mortgage-backed and credit derivative professionals could see incentives be at least 40 percent lower this year. "Plain vanilla fixed income specialists" can brace for a 5 percent to 15 percent reduction, the group said.

Bonuses have long been a key engine for the economy, with investment bankers often spending a bulk of their payouts on real estate at the end of the year, real estate brokers said.

While the overall mood is glum, not everyone has to worry.

Investment banking professionals are still doing well and should expect to see their bonuses swell by 10 percent to 20 percent, Johnson Associates said.

But the concentrated pain in a small segment of the market is going to make it extremely difficult for the executives who are dividing the bonus money. They will have to decide how to reward top producers without hurting those who had a terrible year too much, bankers at the Finance Summit agreed.

"That is going to make the math a lot harder this year," said John Duffy, chief executive and chairman of boutique investment bank KBW Inc (KBW.N).

"It looks as if Goldman Sachs (GS.N) will pay really big bonuses, again," Headwaters Capital's Thomson said.

He added: "And that will put pressure on everyone else not to lose their people."

Compensation experts at Options Group found that lower bonuses at banks hit hardest by the credit crunch could put a lot of their best salespeople and traders "in play" early next year.

(Reporting by Svea Herbst-Bayliss; Editing by Jeffrey Benkoe)