Over the past few weeks, a strangely coordinated affair played out across investment banks around the world.
At the surface, it manifested itself in short, ten-minute conversations – all revolving around a single number.
A number that is, at least theoretically, supposed to reflect a full year of work.
Peel the onion back a little more, and that same number can well serve as a direct (and ruthless) indication of organizational power and potential.
Yes, it was bonus time.
Many years ago, I often wondered what it must feel like to be on the receiving end of the bonus conversation.
Sitting here in 2021, I have now been on the “other side” for a decade. As a result, I walk away from my annual comp discussions with a very different mindset.
Today’s post is about some of the lessons I’ve learned over the years.
It’s Never As Good As It Looks
The media loves writing about banker bonuses.
Few things stir emotions like a story about some smug-looking finance shmuck type getting a humongous payout while the rest of the country is circling the plughole (by the way, is the country ever NOT circling the plughole?)
While I won’t argue that some folks really manage to clean up out there, that’s not what happens in practice.
Walking the tightrope of an up or out career isn’t easy.
The vast majority of well-paid bankers, lawyers, and consultants will rarely last more than a few years in the industry.
As such, their comp is unlikely to exceed low six figures before they cycle out (or are spat out) in search of less punishing pastures.
Those who manage to hang on long enough quickly discover what the true economics of a £300k bonus look like.
Now, let’s be clear – this is not about shedding a tear for people on the receiving end of a bonus like that.
Equally, you simply cannot ignore…
…The Uncertainty Of Trade-Offs
Nothing in life is guaranteed. That being said, there are two most obvious paths to landing a well-paid professional job.
The most straightforward one is to go to a private school and follow that with a degree from Oxbridge (St. Andrews, Imperial, and Durham might also do) or a top US university.
It’s not a guarantee, but a combination of good grades, sociability, proactivity (and the good old network) is likely to give you a decent fighting chance.
The first option will set you(r parents) back roughly £400k.
The second will cost about $200k in tuition + living costs plus two years of foregone income.
However, the headline numbers are not the right way of looking at it. In today’s world of near-50% marginal tax rates, you need to make as much as £800k in total to foot that private school bill.
And then there’s the opportunity cost.
This is a good time to pause and ask yourself: would you rather hand your child £2.7m on her 40th birthday?
Or send her to private school so that she has the option of slaving away in her 20s and 30s for the mere chance to make that money herself?
That chance, of course, being predicated on luck – but also fighting it out with equally well-educated, ambitious, and hard-working colleagues.
Yes, there’s the whole point about teaching a man to fish and so forth. Equally, that’s a LOT of fish to catch.
And while expensive schooling will get you a spot to fish from, it certainly won’t guarantee the catch.
Now, for the good news:
It’s Also Not As Bad As It Seems
While bankers certainly work hard, the level of sacrifice required is often overstated.
Partially, this is because those bankers who start in the industry right out of undergrad simply don’t have any basis for comparison.
Dinner in the office? Cry me a river.
Late nights working on a deal? Most people would probably be up late anyway.
Sure, some may be bingeing on Netflix. But many others may be working much tougher, and significantly lower-paid jobs.
Working on weekends? Welcome to the real world, where millions of people typically do just that – do you hear them complaining?
Regardless of what people will tell you, it’s not like you are a firefighter or an Alaskan crab fisher.
Yes, it does get progressively tougher as you get older and start a family. The emotional cost of working all the time skyrockets as years go by.
But if you are young, energetic, and motivated, you don’t want to waste your time watching TV, hanging out on social media, or drinking more than you should in the first place.
Might as well work and make money instead.
In a way, you could almost argue that banks have really mellowed out post GFC.
At least at the junior level, luxuries like protected weekends and undisturbed holidays were unheard of back in the 90s and early 00s.
It’s NOT About Your Performance
There. I’ve said it.
Yes, being good at what you do (which, in a highly competitive industry, requires a LOT of effort) is a pre-requisite for getting paid well.
Making sure others recognize your efforts is just as important.
But the biggest determinant by far is what others are willing to pay you.
In other words, it doesn’t matter that you rake in tens of millions of fees for your employer.
If you do something so esoteric that you don’t have any other employment options (including setting up your own shop), your pay is unlikely to reflect your economic value add.
Equally, you may not be a stellar performer but if you are in an incredibly hot space (SPAC bankers, anyone?), your employer is likely to treat you well lest someone else try and poach you.
The bottom line is that you simply cannot have the basic economic law of supply and demand work against you.
Keep that in mind when choosing a specialty.
The Side Effects Of Money
I’m not about to channel Puff Daddy here, but more money can indeed lead to more problems.
At the risk of being controversial, let me give you a couple of examples.
The first one is motivation, pure and simple.
At the outset, each bonus is hugely incremental to your net worth. Watching your “number” grow in leaps and bounds can help rationalize the sacrifices you are making.
As your net worth grows, each bonus becomes less incremental. It’s one thing to pull out all stops to double or triple your net worth. It’s quite another to make the same sacrifices for a 5% uplift.
The other danger is the aforementioned opportunity cost.
Let’s say your earnings are a multiple of what your significant other makes. It’s a no brainer that you should keep working – and he or she should stay home to look after the family.
It also makes total sense for you to put in a few more years to help out your parents, siblings, nephews, and anyone else who isn’t as fortunate as you are.
But at the same time, it can leave you feeling trapped in a job you no longer enjoy, spending years which you don’t necessarily have.
Most people are oblivious to the effort it takes to keep going. In addition to feeling guilty, leaving a well-paid job behind can expose you to criticism you never expected.
In retrospect, spending the last ten years in investment banking was the right decision for me.
That being said, I often wish I had the full picture of what I was getting myself into.
I hope that those readers who are just embarking on their careers can learn from my experience – and that their path will be much easier for it.
Thank you for reading!
PS: You may also enjoy these posts:
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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