Wall Street bonuses, revamped

It’s the time of year that fancy restaurants, bars, and car dealerships around New York City relish: bonus season for the traders on Wall Street. But as banks revise how they pay traders, the wealth may be getting spread around a little differently.

As part of a continued effort to shrink the industry’s long-running “bonus culture”—where the employees who made the best trades received the overwhelming majority of yearly bonus payouts—the major banks are seeking to replace it with sizable checks for an entire team of traders.

It’s a move that may irritate some star traders but overall may create a better work environment. “Employees can count on their colleagues and the desk in order to do the right thing and have a steady year,” says Deepali Vyas, a Korn Ferry senior client partner and global head of the firm’s Fintech practice.

In a sense, the pay for Wall Street traders is moving in the opposite direction of how other types of employees are compensated. Many firms when they change compensation systems, want to give more in bonus money to the top performers. Indeed, even some financial service firms have recently ended large bonus program for everyone to increase the money for star employees.

But the increasing use of artificial intelligence in trading has altered some bonus structures. Many of the skills that good traders have used to make big money are now incorporated in trading algorithms. It has become a lot harder to determine whether it was human intuition or savvy software that thought of and executed the trade. That is also why banks are hiring lots of data scientists and coders for their trading divisions. Banks also are changing their compensation systems, in part, because they want employees to take fewer risks. Individual traders have been responsible for super risky trades that backfired, costing the banks, in some cases, hundreds of millions of dollars.

How big Wall Street bonuses will be isn’t known yet. Average bonus checks have been flattening out over the past three years, and experts don’t think it will increase much this year even though nearly every asset class increased in value over the last 12 months. Still, traders should get a nice paycheck: Wall Street’s average bonus in 2018 was $153,700, according to the most recent estimates by the New York State Comptroller. Vyas says bank clients believe that the compensation changes are helping them with employee retention. Even among traders, many are looking to switch to places with a more team-oriented environment, she says.

Experts say that any attempt to revamp compensation has to be done carefully, and often only after leaders look at the overall business strategy and talent strategy. “You can’t just say ‘Let’s change pay,’” says Tom McMullen, a Korn Ferry senior client partner and leader of the firm’s North America Total Rewards expertise group. Leaders first have to understand how value is being created for the business, then figure out what types of people create that value.

That isn’t always easy; often, senior leaders within the same company will disagree on the answers to both of those questions. Yet “you start there before fiddling with people’s pay packages,” McMullen says.