I’ve been getting requests to publish this year’s investment banking bonus predictions.
And I’d like to fulfill those requests, but there’s one small problem: there will be no bonuses this year.
Normally investment banks wire transfer analysts’ bonuses directly to their bank accounts upon announcing the numbers…
This year, however, it was revealed that protesters had Occupied the bank accounts of all analysts worldwide, hacking into banks’ websites and stealing all the funds before anyone could withdraw the money and blow it on a trip to Vegas (or a trip to Cain).
It’s unknown what the protesters will use funds for, but early rumors point to using the money to send envelopes containing white powder to banks worldwide.
Good luck getting those bonuses back!
My Sympathies for the Protesters
Ok, now back to non-fiction mode… even though I’ve mocked the protesters before, I actually agree with a lot of the points that they’ve raised:
- The world (or at least the US and other developed countries) is not headed in a positive direction, and serious changes need to be made.
- Tax rates for those in the highest brackets must be raised – sure, cutting spending is necessary as well but you need to do both to reduce deficits.
- Carried interest and capital gains should be taxed at ordinary earned income rates. As Warren Buffett stated so eloquently, “People invest to make money, and potential taxes have never scared them off.”
I do find their entitlement attitude (“We deserve jobs!”) concerning, but hey, many people in the finance industry act that way too – just read this article for the time I almost poked my eyes out and jumped in lava after getting one too many emails expressing a similar attitude .
Anyway, this bonus prediction article is not about the Occupy movement, but you can’t deny the impact they’ve made this year and how they’ve made terms like “The 1%” part of everyday lingo – further fueling the downward pressure on bonuses in finance (and Mitt Romney’s Presidential chances).
What Else Happened in the World This Year?
It’s quite similar to the news from last year: emerging markets surged ahead as developed countries fell further and further behind and further in debt.
Europe continued to be a mess and Greece had to be bailed out… again? I’ve lost count of how many times some type of rescue has been made, attempted, or proposed by now.
The main difference this time around is that there’s a lot more discussion around what these problems mean, and what to do about the growing inequality in many regions.
John Paulson had the best solution of anyone: start sucking and lose a ton of money for all your investors.
Do more of that and more often, and we might just see all this talk of class divides and The 1% go away completely.
Bonus points if you decide to quit the industry and make a public spectacle of it.
Our (Flawed?) Prediction Methodology
Once again, we’re going to use the same methodology we’ve used to predict bonus numbers in previous years.
Yes, it’s flawed and perhaps not as accurate anymore, but this is the best we can do without hiring a spy to infiltrate banks’ compensation committees.
We’re assuming here that bonuses for bankers are directly tied to banks’ investment banking revenue – revenue from trading, brokerage, asset management, commercial banking, and other business lines doesn’t factor in at all.
To get these numbers, we can only use publicly traded banks – that’s why there are no numbers for Moelis, Perella Weinberg, Centerview, and so on (this is mostly directed at the one reader who thinks I’m always excluding Centerview just to spite him/her).
To sum up the assumptions:
- IB bonuses will be awarded in direct proportion to investment bank net revenue.
- Banks still determine bonuses based on a percentage of investment banking revenue – historically close to 50%. Yes, it’s great to have few expenses aside from headcount.
- Analyst numbers are based on the Trailing Twelve Months (TTM) numbers from June 30, 2011 through June 30, 2012 – not calendar year 2011 numbers.
If your attention to detail is good, you know that TTM numbers from June 30, 2011 – June 30, 2012 are not yet available, so I’m basing the Trailing Twelve Months figures here off of March 31, 2011 – March 31, 2012 numbers.
Bulge Bracket Numbers
Let’s take a peek at the damage:
So… things were down, I guess you could say. The main cause was the massive slowdown in deal activity in the second half of 2011.
And remember: even though we’re in 2012, that big slowdown at the end of 2011 will still hurt you since bonuses are based on the trailing twelve months.
Even if you threw out that theory and assumed it wasn’t true, the most recent quarter YoY numbers don’t paint a pretty picture either: almost everyone was down by a lot due to the overall slowdown in M&A and capital markets activity.
When I first started collecting the boutique numbers, I thought they looked a lot better – until I had finished the whole list:
The main difference in this set is that there’s a lot more variability. Firms like Evercore appear to have done quite well, while some of the others here have done… not so well.
However, I wouldn’t read much into the specific differences: revenue is always ”lumpier” at smaller banks because it’s more dependent on a few big deals getting done by the end of the year or quarter.
The overall story we get from these numbers is similar: a big slowdown at the end of 2011 and a slightly better start to 2012, though still down from the previous year.
And the Magic Number Is…
In case you’ve forgotten, last year’s numbers for analysts were:
- 1st Year Top Tier: $60-70K USD
- 2nd Year Top Tier: $75-85K USD
- 3rd Year Top Tier: $90-105K USD
Based on the data above, we’re in for a 15% drop in bonuses this year. So here’s what I predict (using round numbers):
- 1st Year Top Tier: $50-60K USD
- 2nd Year Top Tier: $65-75K USD
- 3rd Year Top Tier: $75-95K USD
Based on what we’ve seen so far with bonuses for more senior people in 2011, these predictions might be too tame and bonuses could fall by more than this.
Wait, Are You Sure?
I’ve seen a few comments asking whether or not bonuses will hit $0 or $5K or something really low this year, but I don’t see that happening across the board at most banks – the data just doesn’t support it.
We’re (still) very far from what investment banking revenue looked like at the true “bottom” back in 2002.
Banks these days might be allocating a lower percentage to bonuses, but it’s hard to quantify without knowing the specific percentage that each one is aiming for.
Goldman Sachs actually awards analyst bonuses at year-end now and the numbers there are lower than what I’ve predicted above, but still higher than $0-5K.
There may be a lot more variability between individuals within groups and between different banks this year.
That’s already supported by the senior banker pay numbers that have been released, and we could see more of that at the junior levels.
You shouldn’t necessarily accept or decline job offers based on the bank’s expected bonus payout, but as you move up that variability will become more and more important because it affects senior people far more.
Other Changes in Compensation
You’ve already seen how more and more of senior bankers’ pay comes in the form of deferred compensation and stock – we may see more of that at the junior levels very soon.
Maybe analysts will still be paid 100% in cash, but non-cash bonuses will start to become more common even at the associate level – it seems to be happening already.
…which should just prompt more people to move to hedge funds and other buy-side roles that aren’t as heavily regulated.
But What About Other Countries?!!
It depends on which other country you’re in. Numbers will be similar in places like the UK or Europe, but in the local currency instead.
In emerging markets there’s a wide range of outcomes because there’s a dearth of talent in countries like Brazil, which makes bonuses there significantly higher (as in, 2x higher than NY / London numbers).
In countries like China, on the other hand, pay at local firms will be much lower, despite the frothy market, because they can afford to pay less.
I already know someone is going to leave a comment about Australia or Hong Kong, so let’s address those upfront as well: base salaries in those regions tend to be higher and all-in compensation can be higher as well.
So yes, effectively there’s a good chance you’ll make more in those regions, and that you’ll pay much lower taxes in the case of Hong Kong.
Should You Still Go Into Finance?
The obvious response here: “What else would you do?”
The “hot” field nowadays seems to be starting your own startup – and just think, you don’t even need an idea!
Having worked in both finance and at startups, I am skeptical of whether or not startups will really “displace” finance because:
- There’s no guaranteed or semi-guaranteed payday (forget about predicted bonuses).
- Most work at startups is actually taxing, annoying and not glamorous at all.
I think it’s great that there’s more interest in starting companies, but starting a company and then sticking with it over years or decades are very different.
And, as Dustin Moskovitz says above, many people would be better off joining existing projects with proven ideas.
So in the absence of your own great idea, I’d say you will still try to get into finance anyway – even if bonuses are a disaster this year.
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