Let’s start with the good news: bonuses are almost certainly going up by 10-20% this year.
Look at the numbers, our analysis below, and other sources, and you can’t help but draw that conclusion.
The bad news?
The irresponsible policies of central banks around the world, led by the lunatic-in-charge at the Fed here in the US, mean that those higher bonuses could be worth… nothing in the near future.
So I hope you’re buying land, cows, dragons, Bitcoins, or something else that will increase in value even if the USD and other currencies come crashing down.
But before we get into the doom and gloom, let’s start with a visual:
The World At Large This Year
As you can tell, I’m not a fan of fiscal and monetary policy decisions in the US over the past few years.
Even if you accept that interest rates should be reduced and that the government should intervene in the economy when a recession hits, should they really keep at it for over four years?
Especially when there is little to no evidence that these policies have produced job growth or boosted the economy out of its anemic state (yes, maybe at first they “stabilized” things, but what good has any of it done recently?).
If I had to pick a theme for the past few years, it would be disparity:
- The S&P 500 has increased at a 15% annualized rate from the end of 2008 through the end of 2012 – great for everyone, right?!
- Wrong, because real GDP growth has averaged 1.5% since then, compared to a historical average of 3.2% since 1929.
- And yes, unemployment is “down” from 10.0% in October 2009 to 7.5% in April 2013… but only if you ignore the fact that the labor force participation rate has fallen from 65.0% to 63.3% in that same time.
- Performance on a state-by-state level is very mixed: witness Nebraska with a 3.3% unemployment rate due to the shale energy boom, or even Texas with a 6.4% unemployment rate… vs. California, with a 9.0% rate.
Oh, and this “recovery” in the housing market is just another case of the government irresponsibly pouring in money to re-inflate a burst bubble. Of course more people will buy houses if you keep interest rates artificially low and guarantee all mortgages… what else would you expect?
Outside the US, the picture doesn’t look much better. Europe continues its spiral into death and irrelevancy, and while there are a few places doing better than the rest (Germany and northern Europe), it’s hard to look past a 12%+ unemployment rate and shrinking GDPs in most of these countries.
And then there’s the whole issue of “deposit taxes” and mysteriously losing a portion of your savings overnight due to an incompetent government, but as long as you stay out of Cyprus you should be OK, right? Right? (See my comment at the top about land, cows, dragons, and Bitcoins)
As a cherry on top, even the BRICs are suffering now: China made big waves a few months ago when data showed slowing growth and falling industrial output. Even with a weak economy, horrible fiscal and monetary policy, and an anemic “recovery,” the US might not be surpassed by China anytime soon.
Assumptions and Sources & Uses
You know how this one works: you’ve seen it in all the bonus predictions over the past 5 years.
We’re assuming here that bonuses are directly tied to banks’ investment banking revenue – all revenue from other sources (trading, brokerage, asset management, commercial banking, etc.) is excluded.
Historically, compensation as a percentage of IB revenue has been between 40% and 50%, but this has been falling and will continue to fall in the future.
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. Some banks have also been acquired or merged over the years, which is why this set changes from year to year.
Analysts at most banks – one exception now is Goldman Sachs – are still paid in the summer, so we use the Trailing Twelve Months (TTM) numbers from March 31, 2012, through March 31, 2013 as a proxy for the June 30, 2012 – June 30, 2013 numbers, which are not yet available.
Accuracy in the Past?
This method has been remarkably accurate in the past – here’s a summary of our predictions vs. actual numbers from 2008 through 2012:
Show Me the Numbers
Let’s start with the bulge bracket performance first:
I don’t have a great explanation for JP Morgan’s numbers, but I highly doubt they had anything to do with the “London whale.”
Even some of the “weaker” banks in this list showed solid growth, though generally the past 12 months were stronger than the most recent quarter.
And then to our beloved boutique and middle market banks:
This list was impacted by acquisitions and shut-downs (see: Gleacher) and is generally more volatile than the bulge bracket numbers. The median increase is definitely lower, but revenue still increased at most of these places.
I may change around this list next year and beyond and swap in new firms – the relatively small sample size here is not ideal given the huge spread in the numbers.
The Bottom Line
Based on these numbers, we’re predicting a 10-20% increase over last year’s bonus figures. This may be less true at the Associate level and in other industries / levels (see below). To refresh your memory, here was actual 2012 compensation:
- 2012 1st Year Top Tier Bonus: $50-60K USD
- 2012 2nd Year Top Tier Bonus: $65-75K USD
- 2012 3rd Year Top Tier Bonus: $85-95K USD
Those are JUST bonus numbers. Here were the total compensation figures:
- 2012 1st Year Top Tier Compensation: $120-130K USD
- 2012 2nd Year Top Tier Compensation: $145-155K USD
- 2012 3rd Year Top Tier Compensation: $175-185K USD
So here are the 2013 predictions:
- Predicted 2013 1st Year Top Tier Bonus: $58-68K USD
- Predicted 2013 2nd Year Top Tier Bonus: $75-85K USD
- Predicted 2013 3rd Year Top Tier Bonus: $100-110K USD
And then the predicted 2013 total compensation:
- Predicted 2013 1st Year Top Tier Compensation: $128-138K USD
- Predicted 2013 2nd Year Top Tier Compensation: $155-165K USD
- Predicted 2013 3rd Year Top Tier Compensation: $190-200K USD
Hey, not bad for entry-level positions… but let’s also be clear: these are the top tier numbers.
Most analysts at banks will receive compensation lower than this, because relatively few receive these top tier numbers – especially when the economy is questionable.
Other Regions, Levels, and Industries
Someone always asks about this. The short answer: it costs too much time and money to gather and verify all this data, and I have no interest in publishing paid compensation reports.
No, they are not “cheap,” but you get what you pay for: think about how valuable these reports would be in salary negotiations for a job offer that pays hundreds of thousands of dollars.
If you are a sophomore in university, these reports are NOT for you – they are intended for experienced professionals who want the best data possible to negotiate better compensation for themselves.
Here are some stats on PE pay in 2013 (based on 2012 performance). The key takeaways: average pay was up 16%, average compensation across all levels was $273K, and 59% of firms expect to increase their hiring this year.
Here are the stats for hedge fund pay in 2013. Average pay was up 15%, average compensation was $314K, and it looks like you’ll still be working 50-70 hours per week (or more).
I don’t have much to share on compensation in other regions or predictions for those regions, but the basic differences are that some places have higher base salaries and lower bonuses, there may be free company housing in some places, and some countries such as Brazil actually pay above market rates due to the lack of qualified talent in the region.
Other Trends This Year
Many of the trends from past years will continue this year: bonus caps at both banks and hedge funds, deferred pay, and even compensation tied to Basel III capital requirements (as if to put another nail in the coffin of UBS).
There have also been some “disturbing reports” from certain banks and groups about people getting screwed in various ways:
- Macquarie apparently paid out a $10K “stub” to all first year analysts, with no bucketing. Ouch.
- UBS bonuses projected to fall by 40-50%?
- Equity research compensation at CS was apparently very bad.
- And even the strippers in London are suffering.
The message is clear: be careful where you work, attempt to move to the buy-side as soon as possible, and don’t even think about pursuing an alternate career path as a stripper in London.
Pay at the Very Top
We always get a few questions about how pay changes at the senior levels, and the answer is always the same: it fluctuates tremendously from year to year depending on the bank’s performance and the perception of the CEO’s performance (and that of other senior executives).
Just to illustrate this point, here’s how much senior-level compensation varied this year:
- Lloyd Blankfein of GS saw a 75% increase in his compensation… while James Gorman of MS had his pay fall by 30%. Notice how those numbers do not follow their banks’ respective performances at all.
- Mike Corbat of Citi earned $11.5 million in 2012, despite only taking over as CEO in October… and even though it’s unclear exactly what he has done.
- Meanwhile, know who earned more than the CEOs of JP Morgan, Morgan Stanley, and even Citi? I’ll tell you who: the CEO of a middle market bank, with a cool $19 million in comp.
So as you can see, compensation for senior-level bankers won’t necessarily follow firm performance or even the size of the firm.
Predictable is just plain boring.
Outlook for Next Year and Beyond
Most sources seem to be in agreement that pay growth this year will be solid. I am more optimistic about PE / VC / HF pay increasing this year into next.
But I am extremely skeptical that this “rebound” in the overall economy is real – or even that it was real – because the underlying fundamentals are poor, the true employment situation has not improved, and neither the US nor Europe are implementing reforms required to fix the economy.
Any number of catalysts could push everything off the cliff next year or beyond:
- Full implementation of the healthcare “reform” in the US (don’t even get me started about how stupid this legislation is – maybe I should write about it separately…).
- Continued slow-down in emerging markets and worsening demographics in China.
- Another “deposit tax” in Europe? More bailouts? Who knows.
But let’s see where the final numbers come in this year first.
And let’s hope I’m wrong about everything above – for the sake of your future bonus.
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
- 2014 Investment Banking Bonus Predictions | Actual Numbers
- 2015 Investment Banking Bonus Predictions