"If banks don't pay you this year, there's no hope"

Bonuses have been announced at the likes of Citi, Goldman Sachs and Morgan Stanley.  The numbers have been occasionally good, but they've also been frequently bad. More than anything, they've been a reminder that the world has changed.  

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"Banking has come back, but if you look at the bonus pool over a four-year period, it doesn't seem to have increased," says one senior markets headhunter in London. "Banks are trying to rein in costs. They're not giving out big bonuses, but are taking the profitability for themselves." 

It's a reality that's reflected both in anecdotal complaints about bonuses that are lower than expected and in banks' own numbers. At Goldman Sachs, for example, revenues were up by 16% last year. Profits at Goldman were up by 68%, but compensation spending rose by only 8%. At JPMorgan's commercial and investment bank, revenues rose by 9% and profits rose by 23%, but compensation spending rose by just 6%. 

It wasn't always this way. In 2021, Goldman hiked compensation spending by 33% after revenues rose by the same amount (and profits more than doubled). "The last time that Goldman did very well in 2021, people were paid up on their expectations," says the markets headhunter. "This time, that hasn't happened." 

It's not just Goldman. There are complaints at Citi and at Morgan Stanley too. "If they can't/won't pay in a year like this, there's no hope," reflects one senior Citi banker. The fear is that the dynamic has changed: with thousands of people let go from the likes of Citi and Credit Suisse in the past two years, it's a buyer's market. Banks don't need to pay any more. 

However, some experienced traders caution that expecting bonuses to increase proportionately with revenues is almost always unrealistic. "In strong years, bonus pools grow at a slower pace than revenues," says Matthias Schwartz, the former head of EMEA credit trading at Bank of America. Schwartz says this is offset by the fact that bonuses also fall by less than revenues when revenues fall.  - It's a smoothing process, made more notable by the fact that banks also smooth between divisions.

"Smoothing removes some of the volatility and keeps compensation range-bound," says one managing director (MD). "Banks will also argue that a good year wasn't necessarily due to an individual M&A banker's efforts, but to financing and lending commitments."  

They'll always point to the bigger picture, the MD adds. "Yes, your division has done great, but unfortunately somewhere else hasn't or there have been regulatory fines. Ultimately, there's always some excuse to keep a lid on things." 

Photo by Clem Onojeghuo on Unsplash

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