Headhunters expect slashed bonuses in banking

IFR Asia, December 2011

There’s just one question that investment bankers in Asia want to ask the region’s top headhunters. Just how bad is the next bonus round going to be?

“The next six month outlook is grim,” says one of the region’s leading banking headhunters. “Given the problems banks are going through, this bonus round is going to be very ugly. There will be cuts between now and the end of the year.”

A second opinion? “I suspect total comp will be cut in half for the good people, and for a lot of others there are going to be zero bonuses,” says another.

A third? “There is a big reduction in compensation,” says another of the region’s biggest movers and shakers. “But the bigger trend is that people have finally realised this wasn’t just a short term aberration in 08 and09. This is the new reality: it keeps coming down.”

Even the handful of top headhunters who are prepared to put their names to bearish quotes aren’t much more positive. “We are seeing higher bases, and I don’t know what’s going to happen on bonuses, but I can assure you they will not be going up,” says John Wright, founder of Global Sage. “More of it will be in stock and deferred. I think everyone needs to adjust their expectations because one thing is certain, compensation in the traditional banks needs to be on a long downward trend as the world works through this drawn out balance-sheet recession.” And Christian Brun, one of the founders of Wellesley Partners and in charge of its Asia operations, says this bonus round “could be comparable to the 2008 bonus round,” which is to say one of the worst in recent times.

Oddly, though, the drop in compensation is one of the few areas headhunters can agree on. Otherwise, the experience is very mixed. Some report a dreadful year, others a record; some say fixed income is the only area where anything is happening, others say that’s the quietest area of all. It’s an environment within which consultants play to their strengths and try to thrive as markets around them fail. “This is not going to be, for any of the headhunters, the best or second best year on record,” says Wright. “But for those who know quality, it’s been a good year.”

Different shops report varied areas of activity. At Wellesleys, it’s fixed income and the buy-side in particular. “Asset management has been interesting,” says Brun. “If you’re looking for a trend, that’s an important one.” There is a sense that where many foreign houses have previously existed with a small sales force, they are increasingly aware that they need to build a stable, sustainable, well-led team. Wright sees this too, at least within fixed income asset management. “The biggest area in fixed income is on the buy side,” he says. “Many asset management firms are hiring heads of fixed income for the region; on the equity side it’s more hedge-fund start ups. Most asset managers are about two things: hiring capital formation people, and having a sales force out here.” Several asset managers have been staffing up in the region, but BlackRock probably stands out.

Some find opportunity in other areas. “Hiring in investment banking has been very active in 2011,” says Wright. “Most of the major bulge bracket players will either have completed or begun changing about half of their executive committees – that means new product heads, new investment banking heads, new equity and fixed income heads, heads of legal and operations. It’s a lot of very senior changes, and there are more to come.” People at a vice-chairman level, for example, have been moving. Others expect focused cuts. “We anticipate that many of the shops that cannot provide local currency, local market access in fixed income, are going to cut back significantly,” says one recruiter.

The development of offshore RMB has created some activity both in asset management and around the dim sum bond market, particularly around high yield. And if not offshore, then China itself remains a mainstay. “Most of what we have done this year has been China, then Indonesia,” Brun says. “The focus on China will continue for everyone next year. That is not going to change.” Another headhunter adds: “China continues to be busy in investment banking. We just don’t see any end to the demand for good bankers with great relationships in China. China is the only bright spot on the compensation landscape this year: it’s the one place where there’s no downturn.” India, by contrast, has been relatively quiet as a hiring environment over the last 12 months; many of the leading practices report more interest in buoyant, domestic demand-driven Indonesia instead.

Other areas of growth include private equity. But one thing that’s been missing this year is a bank conducting a major, bull-headed new buildout. In recent years ANZ and, to a degree, Standard Chartered have kept things moving in the industry, not just because of their own big hires but because of the hires that the banks on the losing end have to make to replace the lost stars. There was also Barclays’ decision to build from their customary strength in debt and forex into a broader equities capability. And in most recent years there’s been an obvious headline departure: in 2010 it was probably Henry Cai, the China banker, from UBS to Deutsche. But there’s been much less in any of those themes in 2011. The one big move everyone talks about is Nomura’s poaching of a team from Deutsche Bank led by Daniel Mamadou, but in any other year that wouldn’t have stood out as that big. And while people highlight Macquarie’s attempts to build up in debt, it’s not as if it was that small a player in the first place. “Premiums are not a feature of life any longer,” says one headhunter. “It has not been a year of any great drama or excitement in recruitment. There are plenty of individual movements, but not any big strategic buildouts of moves into new business. There is a significant transition in the industry, away from an era of highly complex structured products and into a kinder and gentler world.”

Within the recruitment industry itself, there are a few interesting developments. One is a rumoured tie-up of Global Sage with another, global partner, though John Wright would not be drawn on it when asked. The other is the disintegration of Pagoda Partners, set up in Singapore by Nick Burnham and Andrew Britton, who now appear to be going their separate ways. Pagoda did not respond to written requests for comment. In general the bigger, listed firms such as Korn/Ferry and Heidrick & Struggles face shareholder pressure to cut costs (notwithstanding the fact that as an overall firm Heidrick is on course for a year-on-year increase in profitability, based on third quarter numbers) but are considered big enough to be able to deal with short term shocks; for the many boutiques in Asia, a single big team hire in this environment can make all the difference.

It’s not an environment that’s going to make anyone rich, whether headhunter or client. But it still has the potential to be interesting. As one recruiter points out, the dreadful performance of bank stocks means that many people’s long-term vesting stock options have become worthless – and hence they’re a lot more willing to move. For opportunistic hirers, 2012 could yet be a very lively time.