The not-so-glamorous side of investment banking bonuses

Benjamin Franklin would not be pleased

Benjamin Franklin would not be pleased

The new year is here, and we’ve reached a very special time for those of us in the banking world: that’s right, it’s bonus season.

This is my third year going through this exercise. I came in to banking back in 2010 with few expectations for what my bonuses would be like from year to year. I knew that as a researcher (as opposed to a banker, a trader, or a salesperson) I wasn’t exactly poised to hit be jackpot. Nonetheless, if I told you that the prospect of paying off my grad school student loans with a couple of good bonuses didn’t enter my thinking when I took the job, I’d be lying.

It’s a good thing that I made this career move with the idea that any bonus would just be gravy. The reason is that there hasn’t been much gravy. That’s in part because I joined the banking world at the wrong time, after the boom years of the previous decade that laid the rotting foundation for the 2008 financial crisis. It’s also because I happened to start my bank research career with an organization that ended up riddled by losses, scandals, and mismanagement. Oops!

What I have gained is an appreciation of just how pointless the pay for performance culture is within investment banking, or any other industry for that matter. There are plenty of social scientists who question how much companies’ annual bonuses are actually tied to performance, or whether or not they actually incentivize people to work harder or better. I’d always been somewhat receptive to this line of research and thinking, but life in the banking world is what really hammered the point home for me.

The reality is that how one actually performs is a very poor determinant of how much money one gets in the form of a bonus. The big determinant of course is the overall profitability of the institution. After a pool of money is allocated to bonuses across the whole bank, a portion of this pool is allocated to one’s division, then within that to one’s group, and then from that to one’s team, and then finally to the individual. In theory, one’s performance is a determinant of how much money one receives, but only after a number of other factors and decisions have occurred on a higher level.

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