CNBC has been reporting that Merrill Lynch staff are likely to feel a lot of bonus pain this year-end, as they come to terms with the effects of the huge write-downs their firm made in US subprime lending-related assets.
Although Merrill has already written-down some $8.4bn in assets this year, many expect the firm to make additional provisions of between $3bn - $6bn in the fourth quarter. And although fixed income staff are likely to be the worst effected, with bonuses said to be between 40 - 80% down on last year, other firm staff are also likely to suffer as new CEO John Thain is said to want to spread the pain around. Most staff who work in investment banking and equities are thought likely to see their bonuses flat to 10% lower, with support areas receiving between 5% - 10% lower than 2006. Overall, Merrill's compensation bill is estimated to fall around 10% to $15.2bn this year.
And this will come as a particular disappointment to investment banking staff based in Europe, who have enjoyed perhaps their best year ever in 2007, picking up a larger share of mandates and advising of several headline deals. Thain has recognised the issue, insisting that 'paying the people who perform well and taking enough money from the people who cuased some of the problems' was 'one of the first topics I address'. The reality, however, is that, in the current market uncertainty, there's not going to be a lot of alternative job opportunities for bankers upset at the size of this year's bonus cheque.
The other rub this year is that senior staff are likely to receive a larger proportion of their bonus in shares / stock options this year, with some claiming that the equity element of bonuses could be as high as 75%. There is, of course, some compensation here for those who intend to stick around for the 3 to 5 years that the stock / options will vest over - with Merrill's stock currently in the toilet (floating around a 5-year low), the firm's stock price could have risen significantly by the time it comes to cash the equity in.
Merrill Lynch came in third bottom in the recent Here Is The City 'Bonus Anticipation' Poll, with only 7.7% of the firm's global staff who took part indicating that they expected a bigger bonus payout in 2007 than they received last year. Only Bank of America staff (7.1%), and WestLB staff (5.4%) came below Merrill staff in the poll.