A 15-year veteran of investment banking gives the scoop on two key aspects of the game: the salaries and bonuses enjoyed by investment bankers, and how the industry continues to be fuelled by bonus culture, 12 years after the financial crash.
A love of money is important in the industry. It is why bankers stay working as long as they do. It is why university graduates are still lured in. And it’s ultimately why bankers are still the scorn of the general public.
Every action of a client-facing banker is driven by the magical carrot of a bonus, dangling at the end of the year. More deals mean more fees. More fees mean more revenue for the bank. And more revenue means a bigger bonus.
In the early 2000s, a bonus of 100% of your salary was probably the baseline. As you made your way up the ladder, 200%-400% of your salary was what you aspired for. A total package for a debt capital markets (DCM) vice president or a director (which is a rung in investment banking) in the early 2000s could comfortably have been in the £200-300k range, with a £50-75k base. And then potential uplift from there for ‘good years’.
The financial crisis of 2008 complicated this, of course. The negative press and subsequent wrath of the general public meant financial institutions had to feed bankers their bonuses more discreetly, through stock or deferred components.
Although bankers tend not to speak about their personal pay packages, you can pick up a general picture through talking to other bankers about their institutions. Pay structures now have vesting schedules and deferred payments. Structures also vary across US, European and Asian banks, with the American banks pretty much returning to pre- crisis levels.
The American banks pay your average DCM banker $600-750k in a total package. The UK and European banks range between £200k and £400k, with around 25% deferred over three years and the remaining 25% in shares that would also vest over a three-year schedule. Mergers and acquisitions (M&A) specialists, as well as coverage bankers often make more, subject to ultimate deal revenues and the state of the broader M&A market. Needless to say, it is never enough.
It will be interesting to see how the world of investment banking copes with coronavirus and its ensuing corporate fallout. An industry that relies on communication, travel, interactions and deal flow may struggle to sustain itself and pay out bonuses that keeps the machine moving.
Bankers are known for their eagerness to jump on the next flight. With many banks struggling with higher levels of uncertainty, deal activity is more sporadic – be it M&A or other opportunistic financings. It is hard to imagine bankers justifying long travel. However, I knew bankers who would jump on a flight at the shortest of notices or slightest of hints from a client. All it took was a proverbial ‘flash of the proverbial ankle’ and voila! Your banker was there.
In the UK, a director on our team was notorious for comparing the air miles he had earned at the end of each year and bragging about the status he had achieved. ‘Oh man, I have been so busy and on so many flights this year, they even know to take out the macadamia nuts from my snacks now,’ he would brag.
You would think that the last financial crisis would have brought a bit of humility to the industry as a whole. Bankers should have learnt that not everything they touch turns to gold. Granted, there are larger compliance departments than five years ago – in some cases larger than the number of actual bankers themselves – but they do not seem to stop bad actors doing the same thing all over again.
From my perspective, there’s little to stop a repeat of the Great Recession. Back in 2007-08, Citigroup, AIG and a few others were deemed ‘too big to fail’. RBS was one such institution here in the UK. That is exactly why the US and UK governments stepped in to bail these institutions out: the fear was that the systemic risk caused by the failure of even one of these institutions would be too much to handle. But in doing so, did the government just give bankers the licence to continue on their merry way, because no matter what, there would always be a safety net there? With the merging of entities and the bloating of balance sheets, the ‘too big to fail’ group is probably even scarier than before.
I’ve listened to the earnings calls that banks give to investors and analysts, as well as the yearly results calls by the chiefs of all these institutions. And I have often scratched my head. Rather than getting simpler, I would say the financials of these institutions have got more complex. Yes, you had your line items for income statements and balance sheets and so on, but each of those line items had such an excessive level of detail buried in the footnotes that you needed a Sherlock Holmes-style mind just to find them. In the UK, I often found myself trying to figure out what the true earnings of our company was: before exceptionals, after exceptionals; before charges, after charges? It’s all purposefully opaque.
But the gods of finance have offered the industry an opportunity for redemption, albeit in the form of a pandemic. Businesses are struggling, employees are being laid off, there is a shortage of cash and we are suddenly in familiar territory again – we are entering the trough of a recession. It looks like it’s going to be a big one.
So, yes, bankers can keep making those deals, keep their clients engaged and keep the money flowing. Whether people realise it or not, that’s what is needed. What banks can also do is lend more: to small businesses and to individuals, and without exorbitant fees, hidden charges or penalties. It would also be a good opportunity for those bankers to take their minds away from their bonus. They could even sacrifice some of it. Maybe donate it to a charity of their choice. Or try do something positive and socially uplifting with their positions of extraordinary privilege. Whether they grab this opportunity and enforce these changes for the better… well, as a former banker, I wouldn’t be betting my bonus on it.