Show Me The Money (Lessons From Bonus Time)

Show me the money

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.

Breaking down a £300k investment banking bonus

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.

If private school is out of reach, you can always try to reinvent yourself with an MBA.  By way of full disclosure, this is the path I followed.

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.

True cost of private school

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.

Yes, sometimes it all gets a bit overwhelming. Equally, you’ll get your breaks (unless you happen to work at Moelis).

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:

Seven Popular Misconceptions About Investment Bankers

A Candid Look At Investment Banking Salary And Bonus Levels

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Banker On FIRE is a London-based 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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16 Comments

  1. The motivation part is real and funny at the same time. After a decade, my salary is the highest it has ever been.

    Yet, it doesn’t move the needle as much with my net worth.

    I guess it’s a good situation to be in.

    Cheers!

    • The best part about it is that it applies to folks above us as well. Thus, at some point, they are bound to feel like stepping aside and making space for the young(er) guns.

      Am sure we will do the same when our time comes.

  2. Partners at Big4 firms are luckier in this regard, since their bonuses are often paid through dividends (taxed at 26% vs 43% ordinary tax rate here in Italy). Bonuses range from 50k€ to 1+ million, which is quite a big pay jump compared to regular managers netting 10-15k.

    On the other hand, the amount of late nights/weekends/family time required does not change that much if you’re a senior consultant or a senior partner – the only things that changes is for how long you’ve been doing this.

    • I’ve worked with some amazing Big4 partners over the past 10 years. That being said, I could never see myself doing their jobs precisely because the work-life balance doesn’t seem to get better with time.

      Same goes for lawyers. Tough to get leverage out of the system when you are billing by the hour (though at least removing the lockstep system is finally allowing for better differentiation).

      • And many of them die before they’re 60. That’s one of the worst kept secrets in the industry. A coronary and a stoke were the most popular ways to go at my former shop. There was one instance of cancer, but she smoked like a chimney, so… Oh, and they all left the partnership before giving up the ghost, so technically, for stats, those gents and a lady were early retirees.

        • True. You can only pull so many late nights and stressful projects before it all takes a toll.

          Were you also at one of the big 4?

          • For a time.

            Btw, I think lockstep is a double-edged sword. It pisses off good (young) performers because they’re being shafted by the fat at the top, but the alternative of eating what you kill is also prone to moral hazard. Especially on the private equity and securitisation side, where time plus materials billing has been largely replaced by fixed fees. Because: if you can’t sell profitable work you can then increase your takings by selling unprofitable work and pressurising staff into not charging their full hours. Since staff are salaried and already working weekends anyway that won’t necessary be detectable unless taken to extremes over a long period of time, or if anyone complains and even then the firm policy is very clearly to not “eat time” so the complainer is the culprit. This eats into the firm’s margins and promotes the yo my bitch (aka apprentice) culture where each partner has their favourite lackeys who cover up project profitability issues when needed and get fast tracked for promotions in return (and then each manager has theirs, etc.). Lockstep disincentives was that sort of thing to some extent, although I agree it has some serious drawbacks.

          • Fascinating. I had no idea there’s been a switch to the fixed-fee side.

            Presumably, the fees aren’t contingent on deal success (yet) like in the banking industry?

  3. Thanks BoF – most helpful indeed!

    I’m starting out the journey to become a Fund Manager… CFA impending, which means further sacrifice. Good to hear your thoughts as someone who is further ahead in their career.

    • I recall the CFA process, can’t say it was too much fun. At the same time, I thought big parts of it were quite stimulating intellectually which isn’t always the case with other designations.

      Best of luck!

  4. I like the “it’s not about your performance” line but rather about the supply and demand. It really makes me wonder if going above and beyond for my employer is worth it. It did give me negotiating power in negotiating a promotion after only 1 year of working but I had to actually negotiate for that. They weren’t going to give it to me unless I asked for it.

    • Think there was an old saying that went “money and power are not given, they are taken”. Applies in the workplace just as well.

  5. Good breakdown of how a bonus is paid. It is because of my deferred compensation from stock and cash and a private investment that I had to negotiate a severance. After I did, it made it so much easier to walk away as I was paid out for five years after I left!

    I’m curious, does the average managing Director make $1 million a year or so all in now? If not, what do you think the average managing Director makes total?

    Sam

    • I’m in the same boat. Hundreds of thousands in deferred comp, sadly negotiating a payout is much tougher these days (at least in Europe) than it used to be even a few years ago. In the past, you could go off to join a client and the bank would be a bit more forgiving – not so much now.

      Here in the UK, a good junior MD will make $800k+. Based on that, would assume good mid-level MDs clear $1m easy. At the same time, it’s very performance-driven and I’ve heard of some MDs getting bagels, leaving them with just their £300k ($450k) base.

      If Bankernotfired is reading this I would love to hear his take as well.

  6. I stumbled back on this very good article. From what I know UK IB MD total compensation is quite a lot lower. Base is around the £300k mark with bonuses heavily heavily skewed to those seen to be critical by the bank they work at. I’ve never made anything like those higher amounts outlined by Banker on Fire above. But I know there are some people who have. I can honestly say what other people make is not any motivation for me. Most of it is deferred stock. I think there are other parts of banks – higher risk as well to make more money. Equally I’m fully aware that median salary in the UK is about £30k, some of my close old friends make this money and therefore this is kind of a ridiculous non relatable conversation to have for many people.

    Dalton Harris – On CFA – my entry into investment banking was partially / materially opened by studying for my CFA in the evenings and weekend whilst I was in a different career. A couple of job moves later and I found myself in M&A. I found the CFA really tough, i took two weeks holiday before each exam to study and gave up every weekend and evenings for months and months before the exams. I remember getting late night taxis home and studying in the car. I passed each one first time and in the shortest time available. I still remember the mental scars. Equally agree with Bankernotfired on the interest levels – I never knew what a DCF was before I studied for my CFA that’s how green I was. 15 years later I’m closing in on a net worth of £5m (in 24 months or so) from close to a standing start through saving >70% net salaries and 100% net bonuses. I’m not telling you to boast but to give you and anyone else motivation.

    • Interesting. There’s so much speculation re: bonuses that it’s tough to tell smoke from mirrors.

      That being said, a number of the mid-level director bankers whose bonuses I am privy to are clearing between £400k-£500k a year. A few standout performers in successful teams get north of half a million sterling, but few cross the £600k threshold.

      Thus, the MD figures of $800k US / £600k didn’t seem like a stretch. But as you say, very dependent on bank, group, and specific individual’s “scarcity value”.

      And in any event, makes for an incredibly privileged group of people compared to the broader population, even if many are oblivious to that fact.

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