It’s the end of the summer, and you know what that means: 2013 investment banking bonuses have arrived.
(OK, only at the analyst-level and only at some banks – GS now pays bonuses at year-end for all levels.)
The good news: despite a terrible economy, a pathetic “recovery,” and a Federal Reserve that should be disbanded for supporting crony capitalism and introducing irresponsible monetary policies that will likely result in a global financial meltdown worse than the Great Depression, you still got paid this year.
The bad news is that my own predictions were off, and most banks paid less than what we called for back in June in the 2013 bonus predictions infographic.
We predicted a 10-20% increase, but bonuses at the analyst level came in flat at most banks.
The key trend is something altogether different: many banks, even within the same tier, now pay substantially different bonuses to analysts.
The days of “Street” compensation seem to be long over, so maybe I should get back into the business of ranking the banks once again…
What’s the Damage?
Let’s start with the rough “median” numbers and then look at a few places that paid above and below these figures:
- 1st Year Analyst, Top Tier Bonus Bucket: $55K USD
- 2nd Year Analyst, Top Tier Bonus Bucket: $70K USD
- 3rd Year Analyst, Top Tier Bonus Bucket: $90K USD
Yes, you read that correctly: bonuses were effectively the same as last year’s numbers at most banks.
In terms of total compensation, that comes out to:
- 1st Year Analyst, Total Compensation (Top Tier Bonus Bucket): $125K USD
- 2nd Year Analyst, Total Compensation (Top Tier Bonus Bucket): $150K USD
- 3rd Year Analyst, Total Compensation (Top Tier Bonus Bucket): $180K USD
Here’s a chart showing the accuracy of our predictions over the past 6 years:
These numbers are quoted in a lot of places because everyone likes to focus on the top tier bucket.
Keep in mind, however, that VERY few analysts actually receive these bonuses because only a small percentage rank in the top tier.
So take off around $10K per level to see what the “average” bonus was (i.e. $45K USD, $60K USD, and $80K USD across the 1st/2nd/3rd year levels).
$115K total compensation for your first year out of undergraduate is not too shabby, but it is a step-down from the bubbly days of 2006-2007 when $140-$150K total compensation was within range.
More analysts also ranked in the top tier back then since banks paid less attention to compensation costs.
But Here’s Where It Gets Interesting…
I mentioned that banks now pay significantly different bonuses, even within the same “tiers.”
Here are a few examples:
- BoAML apparently paid higher-than-median numbers, and the top tier bonus for 1st year analysts was $70K USD. Very nice.
- Some middle-market and boutique firms paid less than these numbers – e.g. RBC only paid $50K USD for the top tier 1st year bucket, and Raymond James paid in a similar range with 3rd top tier bonuses around $10-20K USD lower than the “median” above.
- But then some boutiques, such as Moelis & Co., paid bonuses significantly above these numbers – with some reports of an $80K USD top tier bucket for 1st year analysts and $90K USD for 2nd year analysts. A few others also paid above the median figures, though not as high as the Moelis numbers.
So that is the world we live in in 2013: interest rates are near-zero, economic growth is laughable, and you might earn more money as an IB analyst at Bank of America Merrill Lynch than you would at Goldman Sachs.
Once Goldman opens up its own chain of ATMs, the cycle will be complete.
Why Did Compensation Stay Flat at Most Firms?
Deal activity, advisory fees, and investment banking revenue at most banks were all up by 10-20% over the same period last year, so how could compensation have stayed flat?
Four factors come to mind:
1. Banks Changed Their Compensation as a % of Net Revenue Targets
This last one is the most likely culprit, at least for the change in compensation this past year.
Historically, banks have awarded 50% or more of net revenue to employees in the form of compensation.
But now, in an attempt to boost their ROE (Return on Equity = Net Income / Shareholders’ Equity – one of the key metrics banks are judged by and similar to revenue or EBITDA growth for normal companies) and regulatory capital due to Basel III and other new regulations, banks are moving this target closer to 40%.
Think about the numbers: if banks paid out 50% of net revenue in the form of compensation in the past and revenue increased by 10-20% this year, paying out only 40% of net revenue in employee compensation would result in roughly flat compensation with a 20% increase in revenue, and a ~5% drop with a 10% increase in revenue.
These percentages are lower at more diversified commercial banks such as JPM, but even there the ratios have been falling in recent years.
This has become so significant that I’m going to factor it in when running the numbers next year.
2. Weak Economic Data and Outlook
There have been a few bright spots this past year, but also plenty of negative data on everything from GDP growth to the unemployment rate.
And the slowdown in emerging markets is very real, with China’s growth rate tumbling and unlikely to return to the 10%+ level anytime soon.
Banks may be less likely to increase bonus payouts when the “real economy” is still so weak – and much of the increase in M&A activity since the financial crisis has been driven by easy money and low interest rates rather than real economic growth.
Just think about this fact: low interest rates and QE may have been responsible for 47% (not a typo) of S&P earnings growth since 2009.
3. Uncertainty Over Government Policy
Another issue is that no one can tell when the Fed will scale back QE, or when central banks following similar policies around the world will do the same.
It has gotten to the point where the entire stock market moves up and down based on suspicions of the Fed’s next move; it’s almost like a top-down planned economy rather than capitalism.
Banks know this, of course, and they don’t necessarily want to increase bonuses right now since the stock market and deal activity will both take a plunge when quantitative fleecing finally stops.
4. The Affordable Care Act (“Obamacare”) and Rising Healthcare Costs
I am very tempted to write a 20,000-word article that explains why Obamacare is such a horrible idea, but I’ll say this for now: this legislation effectively increases healthcare costs for all companies, including banks and finance firms of all sizes.
More money spent on health insurance that you don’t need = stagnant-to-declining salaries and bonuses.
In fact, wages across all industries have stagnated or declined over the past 10 years partially because healthcare costs have grown at ~2x or more the rate of inflation.
Sure, banks have more money to spend on employee compensation than other firms… and some finance firms do already offer very generous health insurance plans
But at some point, rising healthcare costs eat into banks’ profits just like they’ve eaten into everyone else’s.
What About Associate Pay and Pay for More Senior Bankers?
Bonuses for senior bankers are paid out at the end of the year / early next year, so no one has the numbers yet.
A lot of people have been predicting a 10-20% increase, just as we did for the analyst numbers above, but this conclusion seems doubtful now.
I would expect, at best, a flat to 5-10% increase in pay at the more senior levels – counter-balanced by an increasing percentage of compensation in the form of stock and deferred payments.
What About Different Regions?
No, I don’t have the numbers for other regions, sorry – it takes too much time to gather all the numbers and I can’t justify spending hundreds of hours on it if we give away the information for free (and I have no interest in releasing paid compensation reports).
There are plenty of companies that issue compensation reports each year, so I would check the Job Search Digest reports below if you want all the data by region and other criteria.
In general, total compensation in most other developed countries at large banks follows the numbers quoted above for the US, but the split between base salaries and bonuses may be skewed more toward base salaries; some regions these days may pay above the figures above (great article on Brazil), and once you go beyond the global banks you get into unpredictable territory.
PE and HF Pay?
Again, your best source is Job Search Digest. Here are the stats for 2012 compensation:
- Hedge Fund Summary: Average cash compensation of $314K USD, up 15%; average compensation did not differ tremendously between different fund sizes.
- Private Equity Summary: Average cash compensation of $273K USD, up 16%; PE almost always offers higher pay then VC, though there are exceptions for Partners at some funds.
No, no one has 2013 numbers yet because they are determined at the end of the year into early next year.
Outlook for 2014 and Beyond
I continue to be very skeptical of the monetary and fiscal policies in developed countries because most governments are ignoring huge structural problems or “hiding” them via artificially low interest rates rather than reforming their broken systems.
Until that changes, I doubt that we’ll see any real economic strength. Sure, the stock market might keep surging if QE continues and there’s no “tapering,” but that party’s not going to last forever.
So at this stage, I would expect flat to slightly negative growth in compensation for 2014.
If interest rates jump by more than expected and “easy money” really stops, that could turn into more like “substantially negative growth,” at least in the short-term.
PE and HF pay will hold up better than that because of lighter regulations and compensation that’s less tied to deal activity in the current year, but the % increase will likely be less than the 2012 figures.
- We’ll see more municipal bankruptcies in the US. If you thought Detroit or Stockton looked bad, well, what about the entire state of California going bankrupt? Meredith Whitney wasn’t wrong on her call back in 2010 – the timing was just off. High pension costs, inflexible unions, and declining populations really do make many cities fiscally unsustainable. Chicago may be the next major city to declare bankruptcy, and the mayor seems to agree with me.
- China’s “banking system,” by which I mean a giant black hole that no one really understands, will continue to come under pressure and bank failures are likely. Apparently, they didn’t learn anything from the US when it came to that whole “Use a lending bubble to prop up a weakening economy” strategy.
- Europe, Europe, let’s see… eh, nothing good to say there, maybe I just won’t say anything at all.
One final point: data on bonuses was less widely reported this year than it was in past years.
So if you’ve heard any specific numbers, or you agree / disagree with the results above, feel free to post your findings in the comments below.
NOTE: Given the content of this post, more optimistic numbers and findings are highly encouraged…
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 | Actual Numbers