“Why are the girls flocking? It’s Bonus Season, and the numbers are looking good. The average on The Street is around ~50-55K. Blackstone Group leads the group at 60k with Bank of America IBD rounding up the pack at ~$200.00 CAD (up 30% from last year).”
-Bonus Season, The Leveraged Sellout (note: these refer to 2005 bonuses)
So the question of the hour (and all the 1st Year Analysts have been asking me about lately) is what 2008 analyst bonuses will be.
You might have seen the spreadsheet Dealbreaker posted awhile back on expected bonuses (the sources are all either “Staffer,” “Rumor” or blank, so this is obviously reliable information).
Some variant of this spreadsheet floats around every year, and it’s always overly optimistic. Over the past few years, though, bonuses were close to predictable because M&A activity was up each year, investment banking revenue kept rising, and America wasn’t in danger of being sold to China.
No one knows what’s going to happen, but we all like to speculate. And hey, I work in the industry so I must know something more than the average person, right? Right?
How Bonus Numbers Are Actually Determined
Before getting into why I (almost) believe the numbers in the spreadsheet, keep in mind how banks determine bonus numbers: they tie total compensation to a percentage of revenue (usually around 50% of revenue is paid out in compensation) and look at what everyone else on Wall Street is doing to make sure they’re in-line.
The 50% number above refers to total compensation for all employees - so it’s difficult to separate out what % is allocated to Analysts, Associates, and so on vs. what is allocated to senior bankers and even to middle and back-office guys (yeah, they get paid too… if things are going well).
Still, the basic point is simple: if revenue is down 50%, bonuses are unlikely to stay the same (unless everyone else is doing fine and keeps their bonuses the same… then yours might stay the same as well).
The Cold, Hard Numbers
In this bonus debate, very few people have actually relied on numbers to assert their views. So I’m going to change that and look at actual investment banking revenue this year vs. last year, for a mix of bulge bracket and middle-market/boutique firms.
Analyst bonuses are paid based on 6/30 TTM (Trailing Twelve Months for those of you not in finance) numbers, and while 6/30 quarterly figures for banks are not yet out, we can get somewhat of an idea by looking at 3/31/2008 trailing nine-month figures and comparing them to 3/31/2007 numbers.
As I read through the filings for some of these banks I started laughing because declines of over 100% were marked as “NM” (”Not Meaningful” for those not in finance yet). Just for fun, though, I’ve left them in here because it is quite amusing.
(Note to conspiracy theorists: I left UBS off the list not because I work at UBS LA (I don’t really, I swear) but rather because they did something screwy with their Q1 results and I was too tired/lazy to figure it out at 3 AM. Or maybe I was just hallucinating, who knows.)
We could draw a couple conclusions from this: if you’re at Deutsche Bank or Citi, you’re really screwed, for example. Or that if you’re at Lazard, you’re probably laughing at all your bulge bracket buddies right about now.
But my point is simple: investment banking revenue, on a trailing nine-month basis, is not down all that much - a median of 14% decline. Goldman’s trailing nine-month revenue was up, slightly, as were several others. While Citi and DB in particular were hit hard by all the recent troubles, no one dropped to $0 (unless I were to be cruel and add Bear Stearns to the mix - even then it wouldn’t be quite $0).
However, the picture looks considerably bleaker on a year over year basis for the most recent quarter. Even the mighty Goldman is down over 30%, and the median decline is much higher.
If the trend continues (and all indications are that it has), then 6/30 TTM figures will be down by more than what I’ve suggested above.
Still, based on these numbers I find it difficult to believe that bonuses will drop to $10-20K as some have suggested - revenue was simply not down 80%, nor was it even down to 2001-2003 levels.
Psychology vs. Numbers
I was shocked at these findings. When I started writing this post I had titled it, “Why I Don’t Believe The Numbers” - but then I looked at the revenue for all these banks and realized I might be wrong.
Working in the industry, it’s easy to dismiss the notion of bonuses being nearly the same as last year’s as absurd and not spend a second more thinking about it.
Everyone’s getting laid off; no one who has been laid off can find jobs (especially with thousands from Bear Stearns also looking); and everyone is pitching deal rather than doing deals.
While things have definitely taken a turn for the worst in 2008, remember that bonus numbers are based on the second half of 2007 as well - while depressing, it was not quite the bloodbath 2008 has been thus far.
No, It’s Not 2001 - 2003 (Yet), Sorry
Some people out there on message boards and Dealbreaker comments have used the argument that the economy “feels like” 2001-2003, so bonuses should be about what Analysts made back then ($15-$35K for 1st Years apparently).
While I agree that things are headed downhill and the recession may be both painful and long-lasting, I just don’t think we’re there yet - once again, based on the cold, hard numbers.
Let’s take a look at “recession-era” revenue for some of the banks mentioned above. I’m too lazy to go through filings for all these banks, but here are a few examples:
(Before anyone says anything about attention to detail, these numbers are all in millions; yes I was too lazy to add it and just noticed now.)
Witness how even the mighty Goldman Sachs fell from $1.6 billion quarterly investment banking revenue at the height of the boom to a mere $449 million quarterly revenue in the worst of the recession. Given that Goldman reported $1.2 billion investment banking revenue in February 2008, we still have quite a ways to fall before reaching 2002-2003 era bonuses.
These numbers suggest that we’re somewhere around late 2000 of the last recession - in other words, we’re not close to the bottom yet.
Ok, But Give Me A Number
I hesitate to give a specific number because then it’s easy to see if I was right or wrong. 
But if I had to guess, I’d say that bonuses will be down 20-30% overall. Something in the range of $60-75K for 1st Year Analysts’ top bonus seems reasonable.
“Top” bonuses might be similar to last year’s numbers and there may be a wider spread between top, middle and bottom buckets - that’s a popular theory, but I find it hard to believe anything will stay exactly the same given revenue declines across the board.
There might be more of a difference between individual banks than in past years, but I think this is less likely than the above scenario - people get annoyed if they are paid 30% less than someone at another bank in the same bonus tier.
But I Could Be Wrong…
As a disclaimer, I could be completely wrong here - in either direction. Many of those who lived through the last recession are no longer even in banking so there aren’t a whole lot of well-qualified opinions on this topic (besides my own, of course :).
If 6/30 quarterly figures are worse than expected, bonuses could drop more than I’ve predicted. And since I don’t have a crystal ball, there’s no way to tell what will happen there.
As soon as Analyst bonus numbers become known, I’ll post here and, in the interest of accountability, state if I was right or wrong. My gut feeling is that the Dealbreaker spreadsheet is a bit too optimistic but more believable than bonuses falling to 2001-2003 levels.
But Who Cares, Anyway?
Although people love to speculate on bonuses, this year I think those of us who are still employed should just be lucky we haven’t been laid off (yet). The bonus is a nice reward for all your hard work throughout the year, but you should never do investment banking solely for the bonus.
Or else you might just wake up with a few extra bodies in your bathtub…
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Tags: investment banker lifestyle, investment banking, Investment Banking Bonus, Investment Banking Salaries, understanding investment banking
As an industry insider, it would be awesome if you could post some specific thoughts/views on each (or some) of the banks listed above specifically. This might help a lot of people understand things better, I think.
For instance, in the chart above, it appears Lehman is doing the best. Overall, they are positive in both categories, even if they aren’t the most positive in the last 9 months. The ones that are more positive in the last 9 months (Lazard, Goldman) are negative YOY. However, all one has to do is read the news to see that Lehman may be in a lot of trouble if things persist as they have.
Any thoughts?
A: Great point and one I did not consider at all here in the interest of simplicity. The liquidity of each bank could be relevant - and Lehman will be in a terrible position if this is the case.
However, my gut feeling is that analyst bonuses between different banks will not be substantially different. No matter how many writeoffs have been incurred, Analyst bonuses are very minimal compared to what the senior bankers get - and banks care far more about matching everyone vs. saving a few million on Analyst bonuses when they’re dealing with billions of dollars.
Of course, if something crazy happens and Lehman collapses or something, this will not be the case but my gut is different banks will award similar bonuses and top will be 20-30% lower this year.
The point of the data above was more to show that in general, TTM banking revenues have not declined quite as much as some have claimed (although clearly they have for certain banks….).
Can you comment on the rumors of a potential buyout of Lehman by firms like Blackstone and JC Flowers? Is there any truth to these? Or is it all speculation?
I’ve been hearing some rumors of this by friends in the HF/PE community but unclear whether there’s any truth to it. A lot of times there’s rampant speculation on deals that never happen, but then look at Bear Stearns… seems fine externally one week and the next it’s gone.
I would say there are at least ongoing discussions on the buyside about a possible Lehman deal, but just not sure how serious it is since I have no visibility into their true liquidity right now.
Oh, any why is it that Lehman has been positive both in the 9 month TTM and YOY while it is suffering so much? Is their IBD doing well relative to the rest of the street?
Yeah that’s pretty much it, if you factor in all their mortgage-related activities and FICC and all the picture doesn’t look nearly as pretty.
IBD in general, aside from debt underwriting, is just not down ALL that much on the Street… I think Lehman also had a great Q3 in 2007, which makes the 9 month trailing number look better than it really is and it had a decent Q1 as well. Not sure what specific deals account for that, I’d have to go through the filings again.
Hey,
your numbers seem to a bit off. Correct me if I am wrong but I just got these figures from a research report that compares current fiscal year to last fiscal year. DB’s twelve months trailing revenue is actually a bit more than last fiscal 2007s revenues. DB’s TTM revenue is 105,718 million and fiscal 2007 is 105,211. I’m not sure if I am reading the numbers wrong but I got this from the reuters research report. But you also state this is investment banking revenue so I am pretty sure the numbers i am quoting are for the firm as a whole.
Actually I think your numbers are off.
You are looking at the bank’s entire revenue, I am just looking at investment banking revenue, which I define as debt and equity underwriting plus advisory fees.
how can you have < -100%?
-100% if their most recent revenue is negative because of credit losses… technically should be NM but I left it that way just to emphasize how bad it was.
unless you’re referring to losses, but then you can’t have 50% of a negative number paid out, can you? like they say, half of f*ck all is still f*ck all
I wanted to leave it in so it got counted in the median calculation… if I marked it as NM then the fact that those banks really screwed up this past year wouldn’t affect the median decline at all.
But do sales and trading bonuses get affected because of this negative change? Because it seems, that only the investment banking divisions screwed up in DB whereas the trading did pretty well if they’ve still managed to keep up the revenues from last year.
I mean, sales and bonuses may not be down as much if S&T revenue hasn’t fallen quite as much… I forget the numbers at the moment and don’t have the filings in front of me. But in general, S&T at most banks is also down substantially in the last 6-9 months vs. last year. So I don’t think anyone’s going to do as well bonus-wise as they did last year.