Why do Investment Bankers make so much money? You all know that they do. That’s half the reason that people want to do investment banking (even though it really isn’t a reason to enter the industry…trust me). People hear about the ridiculous wages (and they are crazy!) and then decide to sacrifice their life for this pay packet.
So the question becomes – why do Investment Banks pay so much money? Related to this is why do Investment Bankers work so hard? Wouldn’t it be better to hire double the number of staff and pay them all less? These are the questions I will tackle in this post to give you a little bit of an insight into the Investment Banking Industry.
As an aside I should note that I was originally going to write an article on “how much do Investment Bankers earn” however there were simply too many complexities – there is a huge range across year levels, banks, countries, bulge bracket vs boutique and a hundred other factors. Further bonus numbers are incredibly misleading – top tier analysts get paid far more than everyone else because banks tend to rank themselves according to this top tier pay.
Why do Investment Banks pay so much?
This is a question that is debated not only outside Investment Banks but also within them. I’ve had a number of conversations with Investment Bankers about their views on this and there are a few common themes that seem to come up over and over again.
“I would not do this job for less money”
This is a really common response amongst Investment Bankers. You give your life up for the job. You are there working crazy hours on good days and when things get really bad…well those days can just be terrible. To get people to do this job Investment Banks need to compensate their staff very well. During the GFC when all banks were cutting back pay and bonuses frankly sucked in comparison to previous years junior Investment Bankers were leaving in droves. If you could get paid the same amount elsewhere and work half the number of hours…why wouldn’t you?
Compounding this is that Investment Banking is not exactly an industry that people dream about working in. The work can be interesting but a lot of it is incredibly boring and repetitive. This is especially true at the lower levels of investment banking where you’re not actually involved in dealing with the clients or with negotiating the big deals. Most people would much rather be doing something else…and Investment Banks tempt them to stay with large and ever increasing pay packets.
Investment Bankers are always looking for an ‘edge’ to generate fees
This reason requires a bit of explaining because it is a little convoluted…but it may give you an insight into how bankers think. Investment Banks charge outrageous fees to their clients. Instead of charging for their time like most professional services firms do, Investment Banks have convinced their clients that the appropriate way for them to be remunerated is for them to be paid a percentage of the deal value.
When you are being paid a commission based on the value of the deal…you try really hard to land the big deals. A big deal doesn’t require much more effort than a small deal but whereas you may make $2 million dollars on a $100m deal you are probably making more like $20m dollars on a $1 billion dollar deal…for no extra effort. Of course everyone knows this so Investment Banks are constantly chasing the big deals. The problem is that all investment banks essentially do the same thing. There is very little to differentiate Bulge Bracket Bank 1 from Bulge Bracket Bank 2 and so on.
Investment Banks will look for any advantage that they have to prove that they are better. One way for an Investment Bank to be better is to have better, smarter and more hard working staff. This is why Investment Banks want to hire graduates who have it all – the marks, the interest in finance and who are well rounded to boot. So how do you attract the best talent to your firm and how do you convince them to sacrifice it all? Simple…pay them more.
Of course none of this is ever explicitly said within Investment Banks but they spend a huge amount of effort trying to be a top tier paying bank to ‘attract’ the top talent.
Why don’t Investment Banks hire more people and pay slightly less?
This is a really common question that is asked by people that aren’t in the industry. You’re life sucks as an investment banker – wouldn’t you prefer to earn a little less money and work fewer hours? There are a couple of answers to this…but generally no most Investment Bankers would baulk at the idea of earning less money (even if it meant that they had a better lifestyle)
Some investment banks DO hire more staff and pay slightly less…but Investment Bankers don’t like this trade off
But Investment Bankers are generally motivated by money and will gladly give up their life for a little bit extra pay. There is a snob value that comes with the higher pay and very few bankers would trade that in for a better lifestyle.
The Australian investment bank Macquarie tends to pay it’s Australian Investment Bankers less than their American and European bulge bracket counterparts but they also typically have a (marginally) better lifestyle. There are very few people that I knew that would trade in the pay at the American bulge bracket for the better hours at Macquarie (note that in Australia there is no reputational / experience difference between the two – if anything you’re probably doing better deals at Macquarie)
Small, more experienced deal teams tend to be more efficient
Small deal teams are great, especially where everyone on the deal team has done similar deals in the past. Having fewer staff employed means that the staff that you do have are incredibly experienced and are used to working under pressure. You get more efficiency from someone that has done a similar deal recently and if there are less hands touching the deal. As much as I hate to admit it…there are some benefits of having smaller teams and fewer staff.
No one really knows why Investment Banks pay their staff as much as they do. The reasons I have listed above are the ones that seemed to make the most sense based on my experiences in Investment Banking. They may not be the best, nor the most logical of reasons but they do seem to be the ones which fit with the Investment Banking mentality.