This year’s bonus season is going to be a nasty fight

Very few of us will ever be called to the table for the ultimate high-stakes poker game that is the high-level committee which divides up divisional bonus pools in a major investment bank.  But nearly everyone in investment banking is affected by the outcome, either directly or through the knock-on effect on industry comparables and the wider labour market.  So it’s well worth being aware of the rules.  And putting together data points from firms like JP Morgan, UBS and Bank of America plus additional information from boutiques outside the bulge bracket, we can guess already that this year is going to be one of the biggest battles in living memory.

The key issue is that the divisional committee matters most when revenues are good, but concentrated.  When everyone’s doing equally well, there’s no need for conflict.  When overall revenues are terrible, there’s nothing to fight over.  But when one or two areas blow the lights out while others are in the doldrums – that’s when things start getting political.

As Daniel Pinto of JPMorgan outlined on a recent Alliance Bernstein conference call, so far this year, his global markets division is on track for revenues 50% higher than last year, with fixed income trading even stronger than equities. However, other divisions are weak: announced M&A is down 40% year-on-year.  In this situation, it’s always expected that there will be some burden-sharing and that the trading desks will subsidise IBD in the anticipation of some reciprocal transfers in the future.  But how much, and which divisions will get the subsidy?

Looking at the transcript, it seems that debt capital markets (DCM) operations have a decent claim to be paid out.  Although DCM is only up six or seven percent, they’ve been working incredibly hard for their money.  The actual issuance volumes are up as much as 50%, but due to the market volatility, JPM and other banks have been placing high yield deals on a “best efforts” basis rather than collecting an underwriting fee.  That’s in large part a risk management decision which the bankers shouldn’t necessarily be penalised for – they have, for the most part, placed all these deals efficiently and could have pocketed the underwriting.

M&A bankers will have a harder job making their case; everyone knows that the pandemic has caused a deal drought, to the extent that Perella Weinberg is laying off 7% of its staff – it doesn’t have a trading or capital markets franchise to smooth things over.  M&A bankers are therefore going to need to bang the table and talk about the importance of maintaining their long term franchise when bonuses are being allocated.  Even the equity research analysts, the perpetual Cinderellas of the banking world, have a better claim on this year’s revenue, with client engagement on their written-from-home research and videocalls through the roof.

The outcome of this year’s bonus battle in January is going to depend on a lot of potentially explosive meetings starting in November, as sales & trading try to hang on to as much of their revenue as they can, while IBD and research try to chip enough of it away to hang on to their people.  Given the potential for bad temper, perhaps it’s just as well that most of them will probably happen virtually.

Daniel Davies –


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