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If you have managed to keep your job as an investment banker, you are probably being overpaid. Even as mergers and IPOs slowly pick up, pay ratios at investment banks remain elevated.
Bonuses are supposed to fluctuate with market conditions. Instead, they are sticky: firms do not want to lose good talent and often also need to pay guaranteed dollars to bring in new blood before the upturn.
Goldman Sachs, for example, targets an “efficiency ratio” of 60 per cent — referring to all operating costs to revenue — of which pay is the biggest element. In 2023, its efficiency ratio ballooned to nearly 75 per cent due to various one-time charges. The proportion of pay was higher than in 2022 when the efficiency ratio was still an elevated 66 per cent.
Morgan Stanley sets 70 per cent as its efficiency ratio target. Even with that rather high target, it hasn’t made the grade of late.
At the purely advisory investment banks, the goal is to have a pay ratio of about 55 per cent. None of the big advisers — Evercore, Lazard, PJT Partners, Moelis — have been close, with all at least exceeding 65 per cent in recent periods.
Executives have said they are prioritising hiring bankers, suggesting to Wall Street that when deal activity rebounds there will be enough business to push down the remuneration ratio to more reasonable levels. Goldman Sachs, for example, in the blowout year of 2021, recorded an efficiency ratio of just 54 per cent even when gross pay was at juicy levels.
But the tension between shareholders and employees is tricky to reconcile. Shareholders want to put a lid on pay to focus on profit margins. But talent is mobile and wants as much of the pie as it can get. The solution then has been to pay bankers in company stock to better align incentives with outside investors. Any single banker’s contribution to the overall bottom line is limited, so the principal/agent puzzle persists.
Privately held partnership and law firms have the ability to essentially sweep all cash towards bonuses at the end of the year since there are no external shareholders demanding a particular return on their capital.
Some executives are salivating at the chance that AI can fundamentally alter the pay structure in banking — either through labour reductions or productivity growth — leaving either fewer or cheaper bankers. But for now, expect the big beasts of Wall Street to demand every dollar they can get — and shareholders to continue footing the bill.
sujeet.indap@ft.com
