The end of the year is fast approaching and some public finance bankers may be suffering from what is known as "bonus paralysis."
Over the next couple of weeks, municipal bankers - together with the rest of Wall Street - will learn what bonuses to expect come January and February, when most firms actually write the checks.
But bonuses in municipal finance are down since 1993, a banner year for municipals, reflecting the slump in bond issuance and the tightening of underwriting spreads - in some cases now below $5 per $1,000 of bonds - due to increased competition.
Municipal issuance has declined steadily since 1993 when $291.8 billion of municipal bonds entered the market. In 1994 that amount diminished to $164.5 billion, while in 1995 just $159.3 billion came to market. For this year to date, $165.3 billion of bonds have entered the arena.
And with this year's stellar performance by the equity markets, the public finance community's corporate colleagues are sure to be wearing wider grins on bonus day.
But the situation is not all bad, according to one senior banker at a large Wall Street firm who, like many answering questions for this article, asked to remain anonymous.
He said he expects a compensation package roughly equivalent to 80% of 1993 levels, which for senior municipal professionals at his firm ranged from $400,000 to $700,000, depending on performance.
Other bankers predict smaller packages at the larger firms.
"Three years ago bankers at large firms probably made half a million dollars; now they will probably make half to two-thirds of that," said another public finance veteran.
And whatever bonuses muni people may expect, they can be sure that they will lag other product groups, he added.
"The municipal bankers' bonuses versus the corporate-taxable guys will probably get 50% or less," he said. "It's been a record year for corporates and asset-backeds."
The senior banker who is hoping for 80% of his 1993 bonus package explained his firm's expected compensation by pointing to the impact of the Municipal Securities Rulemaking Board's Rule G-37.
He said the rule - which took effect in 1994 and generally bars broker- dealers who make political contributions to issuer officials from doing business with them for two years - has helped level the playing field and bring in more business to his firm.
"It's also the type of business you go after," the banker explained. "If you're going after general obligation bond business, that's where they're starting to treat the bonds like a commodity, where you get into the fee-cutting and spread compression.
"But if you're good at certain specialities - such as health care, housing, student loans, solid waste - the banking expertise is more important and you can charge higher spreads," he added.
And firms that specialize are the type of firms that are recruiting, according to John McLellan, a corporate headhunter who places public finance professionals.
Both McLellan and Richard Baggott, another headhunter who works with municipal people, noted that their business has begun to take on a regional focus, reflecting an overall trend in the municipal arena.
"(The business) has been changing rapidly and I have gone to representing smaller firms," McLellan said.
"In the last several years there has been more growth in regional firms, compared to New York-based major investment banks who have downsized."
Since the beginning of 1995, several large firms have either shrunken their municipal departments or left the business entirely.
In 1995, Donaldson, Lufkin & Jenrette Inc. and CS First Boston both exited municipal finance with the loss of scores of jobs.
In early 1996, Chemical Securities Inc. shuttered its municipal finance division, following its parent Chemical Banking Corp.'s merger with Chase Manhattan Bank.
Other firms - including Prudential Securities Inc., Merrill Lynch & Co., and EVEREN Securities Inc. - have scaled back, albeit on different levels.
Some of those displaced in the fallout at various firms have found employment in other aspects of the business.
"A lot of my work has been with foreign commercial banks that don't underwrite lending and credit support for domestic public finance," McLellan said.
But even though there are fewer firms, declining issuance has meant that competition is fierce, and that can be reflected in how firms compensate their employees, Baggott said.
"The firms that I have been working with are leaning toward more formulated bonuses," he said.
More firms are acknowledging that the investment banker should get credit for the total take on a deal. "Six or seven years ago the banker would just get credit for the management fee," Baggott said. "Today often a banker will bring in a deal and there will be little if no management fee because of shrinking spreads."
Baggott noted that it is easier to recruit from firms where compensation packages are calculated on a totally subjective basis.
However, he added: "It's really hard to second-guess the bonuses. I've seen slightly smaller base salaries being offered (at regionals)."
Compensation packages for senior-level bankers at the regional firms run from $150,000 to $300,000, according to market participants.
Baggott said that December is when things start getting busy for him. "I do an awful lot of scheduling of interviews, but moves aren't made, commitments aren't really made until the bonuses are paid out," he said.
"Regardless of where interest rates are, it has been my experience in January or February that the smaller the bonuses, the better my business."
But in a contracting municipal market jobs are not exactly plentiful, noted some municipal veterans.
"People don't necessarily have to be generous just because it was a good year," said one player.
"It could go either way. They could say, 'We had a good year, so lets pay out good bonuses to reflect (that). Or they could say, 'You know what, where are these people going to go? Munis have contracted so much they don't have much of a choice - we can pocket a lot of the good year and not worry about paying it out.' "
Others disagree. Said another player: "I would find it hard to believe that some of the major participants would do that for fear of losing their key people."