The World Is Flat was released in 2005, but the title applies perfectly to this year’s investment banking bonuses: just swap in “bonus” for “world.”
While we saw the apocalypse and bonus meltdowns in 2008 and 2009, 2010 brought us recovery and higher bonuses.
The economy was better, banks were hiring again, and we had crawled our way out of the recession… or had we?
If this year’s investment banking revenue is any indication, that “recovery” was overblown – because this year’s numbers will be flat, flat, and more flat if my magic 8-ball and Excel spreadsheet are even half-correct.
Remember how this works: investment banks pay out bonuses to analysts 1 year after they start working, sometime in July or August.
Associates and senior bankers get paid at the end of the calendar year / at the beginning of the next calendar year, but here we’re focused on predictions for analysts.
We’re also doing this now because most banks have finished reporting Q1 2011 earnings, so we can look at recent investment banking revenue data and use that in our analysis.
And finally, making these predictions only a few months before real bonus numbers arrive also boosts my chances of being correct.
On a Personal Note…
A few months into my first year on the job, a co-worker – the same one who asked about working on cross-border China deals his first day – told me, “Brian, you don’t care about money enough to work in finance.”
And he was right – I barely look at my bank accounts, I don’t know my yearly earnings until I sit down to calculate them, and I’ve gradually become less interested in bonus talk as well.
But at least back in 2008 I was still in the industry, and in 2009 and 2010 I wasn’t that far removed.
This year, though, I find myself less interested and less sympathetic to (senior) bankers – while they may not be destroying the world, it’s not exactly like they’re improving peoples’ lives or solving important problems either.
Better declare bankruptcy…
The World at Large
A lot happened over this past year, from massive natural disasters to political uprisings that toppled autocracies to Jack Bauer’s slaying of a certain terrorist leader.
Governments intervened more and more in banks’ affairs, and the future of fields like prop trading at banks isn’t too bright.
This is not a news site, so I’m not going to recount each major event; I would summarize the past year by saying, “Developed markets kept falling further into decay and bankruptcy, while emerging markets surged ahead.”
It’s no coincidence that Asia is excluded from that image at the top – that might be the only non-flat region of the world this year.
We already knew about European countries going bankrupt and then even more bankrupt, but now it seems likely that the US will join them.
Amazingly, I still get questions from readers wondering how they can get visas for the US and leave regions like India, China, and Brazil.
You might want to re-consider your plans: going to the US now would be like becoming a Roman citizen in 475 AD, just 1 year before barbarians took over and deposed the last Emperor.
Work in more promising countries, and let the US, Europe, and Japan continue to decline into irrelevance.
Before I get too carried away with doomsday predictions let’s get back to those bonus predictions.
The basic idea is that we can use the increase or decrease in banks’ revenue to predict bonus increases or decreases.
To do that, we’re assuming that:
- IB bonuses will be awarded proportionally to the bank’s net investment banking revenue - not what they earn in other segments like trading, wealth management, or retail banking.
- Banks will still allot 50% of their net revenue to compensation – just one of the benefits of having no substantial expenses aside from employees.
- Analyst bonuses are paid based on TTM (Trailing Twelve Months) numbers – revenue from June 30, 2010 to June 30, 2011 – as opposed to calendar year 2010.
It’s impossible to verify these assumptions, but the method hasn’t changed much in the past 10 years aside from fluctuations in the compensation to net revenue percentage.
Changes from Last Year
The set of bulge bracket banks in our analysis has remained the same.
Back in the 2008 predictions we still had Lehman and Merrill – how nostalgic – and in the comments I even wrote, “Of course, if something crazy happens and Lehman collapses or something…”
Maybe I’m not the best at predicting financial crises.
One of the boutiques from last year – Thomas Weisel – was acquired so I replaced them with a few new boutiques (FBR, Gleacher, JMP, and KBW) to add variety to the set.
Remember that the banks must be publicly traded or you can’t find their numbers – that’s why places like Moelis & Co. and Perella Weinberg are not on the list.
Bulge Bracket Numbers
So, what’s the damage?
Maybe not quite as apocalyptic as the 2009 numbers, but calling these figures “good” is quite a stretch.
Yes, the most recent quarter looks better than the trailing 12 months, but that doesn’t mean much if your bank underperformed in the first half of this period (see: Citi, UBS).
Boutique & Middle Market Numbers
Smaller firms look a little better:
But if you remove the outliers from this set (Cowen and JMP) you get similar results to the bulge bracket numbers: median 1.6% revenue decline in the TTM period and 10.4% growth in the most recent quarter.
Remember, the most recent quarter looked better last year as well but that didn’t result in the 80% bonus increase you were hoping for.
Also realize that revenue is much “lumpier” for smaller banks because one huge deal can change everything for them – so the bulge bracket numbers are more reliable bonus indicators.
Wait, What About Bank X or Bank Z That You Didn’t Include?!!! What About Other Regions / Currencies?!
There are plenty of banks that are not included on these lists – but the idea here is to get a sample and come up with a rough idea of how bonuses might change.
Adding 100 banks to the set wouldn’t change the numbers much, especially since bonuses elsewhere follow what global investment banks do.
Getting this data is about as much fun as a root canal, so unless you want to jump in and do all the work for those 100 other banks this set won’t change much.
Based on these numbers, it seems like bonuses will increase by 0-10% this year.
My real guess is that bonuses won’t change at all.
But predicting a 0% change from last year seems too safe and overly pessimistic – even for me – so let’s just say 0% for the downside case and 10% at the high-end.
Last year’s top numbers were:
- 1st Year Top Tier: $50-$65K USD
- 2nd Year Top Tier: $65-$80K USD
And my predictions last year were:
- 1st Year Top Tier: $60-$70K USD
- 2nd Year Top Tier: $80-$90K USD
I was a little too optimistic back then, so by applying a discount for that and other secret factors, we can get to this year’s predicted range:
- 1st Year Top Tier: $55-65K USD
- 2nd Year Top Tier: $70-80K USD
I’ve increased only the bottom number to make the range narrower, and also because an increase on the high end seems less likely.
Numbers in London are similar but are paid in pounds instead, so just multiply by the exchange rate to get an estimate.
But What About Numbers In…. [Insert Other Country Here]
Given my doomsday predictions above, you might wonder why I’m projecting everything in US Dollars and why there are no projections for other countries.
That’s mostly because the data is more difficult to find elsewhere, and because base salary and bonus numbers may be so different that this analysis no longer makes sense.
As far as other countries, though, you might see an increase in bonuses in regions where the economy is doing well (BRIC countries and Australia, for example) – but it’s hard to compare directly because pay in emerging markets is often much lower and a significant increase doesn’t mean as much.
The most recent quarter showing more of an improvement than the trailing twelve months might indicate that we’re set for a bonus recovery next year.
But I wouldn’t bet the farm on it, because I don’t see the situation in developed markets improving unless governments undergo massive structural changes and spending is greatly reduced.
Flat to minimal growth next year seems like the more likely scenario, barring a cataclysmic event or economic boom.
The True Test
We’ll see what happens when bonuses are announced in a few months and I’ll write a follow-up piece on how accurate or inaccurate these predictions were.
You can entertain yourself with bonuses from years’ past right here:
Historical Bonus Predictions & Actual Numbers
- 2008 Investment Banking Bonus Predictions | Actual Numbers
- 2009 Investment Banking Bonus Predictions | Actual Numbers
- 2010 Investment Banking Bonus Predictions | Actual Numbers
- 2011 Investment Banking Bonus Predictions | Actual Numbers
- 2012 Investment Banking Bonus Predictions | Actual Numbers
- 2013 Investment Banking Bonus Predictions | Actual Numbers
And just keep dreaming of the day we’ll make it back to that all-time high of $90K USD for 1st year analysts in 2007.