The True Economics Of A £300k Investment Banking Bonus

There’s a special mood in the air as we get into the home stretch for the Christmas holidays.

Daily after-work drinks will soon replace the gym sessions.  Christmas party season is in full swing.  Everyone is excited at the prospect a few days away from the office – or a few days of doing nothing in the office!

Of course, if you happen to be an investment banker, there is something else that is setting your heart aflutter these days. 

The Investment Banking Bonus Season Is Upon Us

As it happens, investment banking bonuses are typically announced and paid sometime between December and March.

Somewhat surprisingly, it’s the boring Canadian banks that get to start things off.  They announce bonuses in early December and pay them out before Christmas. 

The big US banks follow suit in January and February.  In a highly anticipated event, Goldman Sachs announces its bonuses in early January.  JP Morgan, Morgan Stanley and Citi aren’t too far behind.

The European banks (i.e. UBS, Credit Suisse, Barclays, Deutsche Bank), who haven’t exactly had the most glorious decade since the financial crisis, typically announce and pay their bonuses in February or March. 

(The cynics amongst us bankers have a theory that European banks simply wait for the US banks to set the compensation bar.  Then, they pay their own employees just enough to prevent them from resigning in disgust.)

Whatever the case might be, you can rest assured the bonus rumour mill will kick into high gear in just a couple of weeks and won’t stop until the bonuses are finally announced and paid. 

Of course, investment banking pay isn’t what it used to be pre-crisis. 

Still, it’s not unusual for a mid-level banker to clear a six-figure bonus in the £300k – £500k range. 

So who exactly are the people getting paid this much money – and is it really a dream come true?    

Meet The People Getting a £300k Bonus

A couple of clarifications are in order.

First of all, while many bankers (and non-bankers) receive an annual bonus, very few will receive one of this magnitude. 

Those who do tend to be client-facing staff focusing on mergers and acquisitions, capital markets, or sales and trading roles.

Second, while there are many banks, only the biggest European and US banks (also known as “bulge brackets”) and the leading independent advisory institutions (i.e. Lazard / Evercore / Moelis / Perella) tend to pay out six-figure bonuses. 

Sure, senior personnel at continental European or Japanese banks get paid very well.  But the likes of BNP Paribas and Mizuho typically don’t generate the kind of revenue per headcount to justify incredibly generous payouts.

With that in mind, a possible recipient of a £300k bonus could be one of the following: 

• A top-ranked senior Vice President in a successful industry coverage group

This could be someone who has really knocked it out of the park executing a few multi-billion transactions and is showing strong potential to start originating transactions of her own.

• A well-ranked Director in a capital markets group

Because Directors typically have fewer exit options, their pay tends to stagnate.  Nonetheless, well-performing mid-level Directors often clear bonuses of £300k or above.

• A star Managing Director (MD) in a so-so year

It’s not unusual for a successful MD to clear a bonus well north of £1m.  But if you didn’t have a great year, you can be assured it will be reflected in your pay. 

• A successful research analyst

In this MIFID II environment, being a research analyst isn’t what it used to.  But there are top performers whose research is valued (and appropriately paid for) by the clients.  They will continue to do well.

• A successful fixed-income or derivatives trader

Sales and trading bonuses are also not what they used to be.  That being said, there are still pockets where significant profits can be generated for the investment banks.  The people who make money for their employers get rewarded.

The Choreography Of Bonus Day

Given the amounts of money involved, the bonus announcement day is always the LEAST productive day of the year.

The head of the team will typically hold ten-minute meetings with his underlings, announcing the bonuses. 

And contrary to what most people think, there is absolutely no scope for disputes or discussions.  As I’ve written before, the time to lobby for a higher bonus was six months ago.    

You simply get your number, perhaps make a cursory comment and leave.  But the way you behave yourself in those ten minutes will go a long way in determining your pay for the following year.

You see, despite what you may read in the press, investment banks don’t like paying their employees more than needed.  In fact, they absolutely hate it.

The objective, therefore, is to pay just enough to prevent the banker in question from leaving for a rival.

Therefore, even if your bonus is miles ahead of where you expected it to be, the best possible strategy is to show mild disappointment. 

If you have a great relationship with your boss, you may go as far as acknowledging that the bonus was “fair”. 

Anything beyond that and you’ve lined yourself up for a pay cut the following year. 

And as you walk out the door, you better keep your emotions to yourself.  Investment banking is an industry where an entire year of blood, sweat and tears boils down to one number. 

The entire department will try to decipher that number based on your behaviour.  So you walk to your desk looking like a Sphinx – all while trying to figure out just how much of your bonus you get to keep this year. 

An Investment Banker’s Worst Nightmare – Bonus Deferrals

Back in the good old days, it was only the taxman who would take a cut of the bonuses before they were paid out to bankers.

That, however, has changed as a result of that slight wobble in the financial markets back in 2008.

Post-crisis, in order to improve the alignment of incentives between bankers, shareholders, and the general public, the regulators have introduced a concept of bonus deferrals.

As a result, investment bankers no longer get the entirety of their bonus right away.  A portion of it is deferred and is paid out over three to five years.

The deferred portion is typically paid out in stock, is conditional on ongoing employment with the bank and can be clawed back by the bank or the regulator. 

And while deferral policies vary by bank and seniority (junior bankers typically get an easier ride), a typical bank would likely defer about 30% of a £300k bonus. 

So between the deferral and the taxman, what you thought looked like £300k actually looks more like this: 

Of course, a hundred grand is still a great number.  But will you be going out and buying a Ferrari and a holiday home?  Good luck. 

Yes, if you stay with your employer for the duration of the deferral period, the deferred portion will eventually be paid out to you.  But that assumes the bank’s share price holds up, which isn’t always the case.

And by that point in time, you will have accumulated even more deferred compensation. 

So unless you plan work in banking until you retire (or drop dead, which is more likely), there’s very little you can do to get your hands on all of the money you’ve earned. 

More likely than not, you will get tired of the incessant travel, the 100+ hour workweeks, intense competition and the kind of office politics that can make Game of Thrones pale in comparison.  

This is why, after spending 15 years climbing up the ladder, the average managing director lasts less than two years in the job. 

Just another day in the office…

In other words, it’s best to treat your deferred compensation as if it doesn’t exist. 

And when that bonus finally lands in your bank account, you better try and make it last. 

There may be a nice dinner or two.  Perhaps a better hotel – or a more exclusive destination – for the next holiday.  A designer tie or a pair of cufflinks.

The rest will likely be spent on school fees, mortgage payments in expensive London, and house renovations.

If you are looking for the next Wolf Of Wall Street, you’ll have to look elsewhere.