Investment Banking – Why is It the Way It Is? Part 2 Compensation Structure: Bonus Drives Behaviour

(Investment Banker Charles Wellington III)
He's Got His Mind on His Money
and His Money on His Mind

Like other businesses IB’s are in the business of making money.  As much as possible. No surprise here.

So what’s the difference from other firms?

Investment banks largely but not exclusively compensate an employee for his or her personal revenue generation.

While investment bankers have relatively high salaries, their yearly bonuses are often multiples of the base. And thus can easily dwarf the base salaries.

Few other industries are as generous.

The more revenue one generates or is seen to have generated the higher one’s bonus.

Promotion depends on revenue generation. Those in the higher realms receive bonuses based on their team’s revenue generation along with any “rainmaking” of their own.

Generating transaction volume and favorable publicity also generates bonus “credit”.

Bosses are therefore motivated to ensure that they “pitch” as many clients as possible. So are those with their eyes on the higher rungs of the corporate ladder.

All of them are also motivated to ensure that no opportunity to pitch is lost because of “bandwidth” problems. Not enough people. Just work the ones you’ve got longer hours. And yourself - ideally.

Woe betide the boss whose team misses a marquee deal.

There is another motive: self-preservation.

In most firms, each banker has a minimum target of annual revenue he or she must generate. An amount that depends on his or her “level”. 

Miss that target and you may find a target of another sort on your back. 

And the target meter resets to zero revenue with uncomfortable regularity. 

It's not what revenue you brought the firm in the past, but what revenue you will bring today.