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This year, bankers are going to pay themselves the biggest bonuses since 2009, which seems unwise to say the least. Why are they doing this? Are they trying to hasten the revolution? Nathan Risser reports from the Square Mile.
Vampire Squid Game
In February 2021, a group of junior Goldman Sachs analysts in London’s investment banking division condemned their working conditions in an 11-page slide deck that they presented to senior management (and which was subsequently leaked to the press). Almost a year later, first-year banking analysts at the firm have had their base salaries bumped to £65,000 and are expecting their bonuses – paid in early 2022 – to be near 100% of that figure. Junior compensation in the finance industry is at an all-time high.
A £65,000 basic salary translates to roughly £43,000 a year after tax. That’s £3,600 a month and, if you receive a 100% bonus, a further £33,000 of hard cash will hit your bank account. Putting that bonus figure in finance terms, it’s equivalent to six Rolex Oyster Perpetual watches bought at retail price or 2,750 signature cocktails at The Ned’s Vault Bar. In layman’s terms it’s 6,346 pints of Taddy Lager at a London Sam Smith’s pub, 1,320 annual subscriptions to The Fence or 1.4 times the average U.K. graduate salary. 21-year old financiers are being paid a net-of-tax bonus with which they could hire their own graduate employee and still have some change left over to buy a pair of ‘deal sleds.’ How did we end up in this situation?
The first thing that happened was deal-making boomed in 2021. The basic function of an investment bank is to help clients – companies, institutions, governments – do things like buy other companies, restructure their existing business or raise money. Put simply, the bank’s clients wanted to do lots of these things in 2021 because financing was cheap and private equity firms were waiting in the wings with stacks of cash (referred to as ‘dry powder’ in the industry) to pump into deals. The banks charge a fee on all this activity and the maths is simple: eager clients + an army of investment bankers = a lot of deals and a lot of money.
So when it became a question of raising junior salaries, banks were already posting record quarterly profits and the underlying narrative was supportive.
The second factor behind the pay rises goes back to the Goldman Sachs analysts’ survey. The leaked slide deck prompted a burst of scrutiny from the outside world and banks reacted to the media storm by throwing money at the problem. They raised salaries, bought Peloton bikes for staff or handed out ad hoc bonuses.
Goldman Sachs did not initially follow its competitors and raise junior salaries. It was a reminder of the ‘Goldman discount’ whereby the bank historically paid salaries below that of their competitors, as the prestige of the firm kept the best and brightest passing through its doors. But then raising salaries and signalling to the industry that the ‘Goldman discount’ no longer existed and the masters of the universe at 200 West Street were going to fight for talent with money like everyone else. A broader question, however, remained of whether increasing salaries would stem the flow of juniors heading for the greener pastures of the buy side.
Ex-investment banking analysts fill the offices of hedge funds, private equity firms and other investment managers who are broadly referred to as the ‘buy side’ given they buy securities or investments. Although it’s a minority who make the move into government, the mythical lure of the buy side remains a reason why enduring two-to-three gruelling years as an analyst at an investment bank before jumping to an associate position on the buy side is a profitable, long-term trade-off.
‘We’re the destination,’ a buy-side associate told me, emphasising that private equity is unlikely to lose its appeal. ‘One thing the banks can’t offer is carry,’ he said, referring to the interest that managers of funds receive (generally 20% of profits) which is favourably taxed as capital gains as opposed to ordinary income. Another source told us a co-worker received a £40k salary premium to make the jump. It’s not just financial motivation, however, that keeps exit opportunities attractive. In a junior private equity role, you still work ‘balls to the wall when a deal is on,’ but somehow that work is all the more meaningful when you are ‘hunting deals rather than being a facilitator,’ the same buy-side associate told us. The long-term prospect of jumping ship to an elite firm may keep some analysts going, but what about the more immediate bump in compensation and the looming bonus cycle?
‘I think a large bonus would appease [me] for a few months,’ one analyst at a U.K. asset manager told us. ‘That said, it doesn’t cure my own personal woes.’ Nor did he think it distracted sufficiently from the structural problems in the industry. It’s a criticism that can risk falling on deaf ears. Senior employees we have spoken to on the matter are continually shocked to hear that a new wave of employees are expecting meaning beyond the money. Those who joined the industry before the turn of the century – before Silicon Valley and the tech ecosystem introduced the world to a supposedly more rewarding, purpose-driven working culture – were under no other impression about what they were joining finance to do: get rich.
But times have changed. After the Great Recession and an era of austerity, the City is a much more sombre place. Backpacks are now more common than Birkin bags and Patrick Bateman-esque flexing in Valentino suits seems outmoded when the male finance uniform – in London at least – consists of navy chinos, a decent pair of Loake loafers, a white un-ironed button-cuffed shirt and a merino-wool three-quarter zip to hide the un-ironed shirt.
To recap: banks had a great year (albeit a busy year). Juniors revolted about their working conditions. Firms, unwilling or unable to change structural problems, made a calculated, economic decision: when supply is tight, you pay more for the product. In this case, the products are graduates willing to pull 100-hour weeks.
But we’re left with a burning question: what are these highly compensated twenty-somethings going to do with all that impending cash?
The answer will have to wait until early 2022 when The Fence is going to the frontline, crawling between the City’s watering holes to report back on the biggest event of the year for every young financier: bonus day.
You can follow Nathan on Twitter here.
Please, Mr Postman
Would you like to write for The Fence? Have a read of this pitch guide here, then send an email to editorial@the-fence.com before the clock strikes 12 tonight. As ever, we are very keen on things that are sharp, funny and unpublished elsewhere. And no more jokes about the LRB or Giles Coren, please… we’ve saturated the market there.
Sword of Dishonour
As we reported back in August, Pen Farthing’s flight from Kabul was not quite the heroic exodus his supporters would have you believe. After the revelations from the Foreign Office whistleblower, Raphael Marshall, came a leaked letter from Trudy Harrison, the Prime Minister’s parliamentary aide, which seems to confirm suspicions that Carrie Johnson overruled Ben Wallace, the Minister of Defence, and cleared the runway for Farthing’s menagerie.
While Downing Street continues to deny any involvement, a government source told us that there was such anxiety that the ‘Operation Ark’ chartered flight would not land, that a RAF C-17 Globemaster was held in reserve.
Online, where he has managed to manipulate public opinion successfully, Farthing continues to deny that British forces helped him in any way.
With his fanatical supporters, typo-strewn Twitter addiction and aggro-laden broadsides on journalists who fail to flatter him, there is something Trumpian about Pen Farthing. It will be interesting to watch how this saga plays out.
A Partridge in a Pear Tree
Christmas Day looms: if you are looking for a present for a truculent nephew, jovial mother-in-law or bookish godchild, then why not give them a year’s subscription to Britain’s most exciting newish magazine?
It is all very easy to do through our webstore here, but if you are having problems, then do reply to this email and we will come back to you promptly.
In Case You Missed It
A review of the global COVID response as the pandemic still rages: John Lanchester drops in with another casual must-read.
The New Yorker responds to the backlash about their Jeremy Strong profile.
More than 50 years later, we’re still waiting for the full facts about the Beatles’ break-up and JFK’s assassination. Mic Wright delves into the relationship between journalism, history and conspiracy.
Stub it out: the toughest smoking laws in the world
One woman’s lifelong quest to bury Leni Riefenstahl, filmmaker propagandist.
And Finally
A year ago, the journalist Clive Martin gulled some fools into thinking that he was the son of Tim Martin, the Brexiteer pub-chain boss, and then wrote a fascinating little write-up about what all that said about the state of public discourse.
After Wetherspoons launched a new campaign that not only borrowed the cuisine but also the typeface of a famous high-street competitor, Clive once again ‘outed’ himself last Wednesday as the son of the controversial multi-millionaire, cloaking a tweet-thread in the argot of Kendall Roy, a fictional character on the HBO television series, Succession.
You would have thought that such an obvious, easily google-able bait would be passed over this time. But you would be wrong: the internet hooted and steamed with another gif-filled outrage train: even a certain long-haired restaurant critic was tricked into thinking that there was a boardroom dispute being played out online. Unfortunately, we’re just going to have to wait a bit longer for the real-life British version of the show.
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Of course, that Wednesday was quite the news-filled day, and we have spent some time trying to work out how best to bring you fresh intrigue from behind the doors of Downing Street. We’ll bring you a very special dispatch from Fergus Butler-Gallie this Friday: you won’t want to miss this one.
In the meantime, please reply to this email to chat to a member of the editorial team. And do let us know how you get on with the latest issue, and we look forward to joining you later this week.
All the best,
TF
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