What we will study from a awful bonus season | USAEMALL.com

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Bankers have a curious aversion to understanding that the investment banking labour market is a market, and it’s one in which the undergraduate economics of supply and demand basically works. 

Some of them feel like the annual bonus round is a report card, in which you should be fairly rewarded for your performance. Some think it’s more like a partnership, where you get your fair share of the overall profit pool. 

But there’s something psychologically intolerable about understanding that your bonus is always your boss’s estimate of what you might get elsewhere, minus a small factor reflecting their perception of your laziness and inertia when it comes to looking for another job. Try this out on the trading floor — people will look at you like some kind of Machiavellian genius.

Unfortunately, this means that bankers often form rather naive expectations, and then get disappointed. According to the people who track these things at eFinancialCareers, this has been exactly such a year. Envelopes have tended to contain numbers significantly smaller than the people opening them had hoped for, and despair has been mighty.

The 2024 bonus round wasn’t really terrible from an objective point of view — hardly anyone who didn’t deserve it got a zero and most people got more than the year before. But as recently as November, people were expecting a lot better. Look at the benchmark Johnson Associates forecasts:

At the firms which have paid out so far this year, the increase on last year seems to have been in the low to mid teens. Business lines which had mediocre or cyclically depressed years more or less got what they expected, but the people who felt like they were killing it didn’t get rewarded accordingly. 

What does that tell us about the state of the market? Basically, to adapt an old cliché, “your real bonus this year is that you didn’t get fired in 2023”. 

One notable feature of the “deal drought” was that it wasn’t really accompanied by any great rounds of redundancies. Even the people let go after the collapse of Credit Suisse (and to a lesser extent, the first round of the Citi restructuring) were, by and large, picked up by ambitious second-tier players who wanted to build their capital markets franchises.

And because there wasn’t so much of a bust, there hasn’t been so much of a boom. Banks are expecting a surge in activity, but they are more or less “right-sized” to deal with it when it happens.

The bulge bracket don’t feel any need to accelerate hiring, and the second tier are feeling a bit poor because of all the money they spent bringing in new managing directors. Nobody is, for the time being at least, contributing any price tension.

In other words, the grumpy bankers and cancelled orders at sports car dealerships are actually a sign of the industry’s confidence in 2025.

They aren’t being stingy because they’re scared the business won’t arrive, they’re being stingy because it is the natural behaviour of employers not to pay more than they have to, and they’ve been anticipating a recovery in deals for quite a while.

Further reading:

— How the bonus season unfolds (FT)