Why M&A bankers are overpaid and credit traders underpaid…well, sort of

As a senior investment bank trader, you expect to be well paid, even if this supposedly isn’t possible any longer. You still believe your pay should be based on a decent percentage of the revenue you attract, despite being the bank’s asset and not trading on your own.

If you want to earn $1M or more in 2014, take a look at becoming a senior credit trader. In an analysis by the information firm Tricumen, these traders are clearing the $1M level. Neither cash equities traders nor senior commodities traders are reaching that today. Neither are prime services providers, who direct lenders of securities to hedge funds. In making their determination, they examined operating revenues by products among the top investment banks, basing their calculations on full time front office personnel at the vice president (VP) level and above. ”We’re not taking into consideration the back office guys,” says Darko Kapoor, a Tricumen partner. “They can dilute revenues per head considerably – especially at French banks, where the back office tends to be very large compared to U.S. firms.” As an example and based upon the first half of 2014, credit traders are responsible for average revenues of $3.7m each. If these trends hold firm, these traders should average $7.4m each by the end of 2014. For comparison, equity derivatives traders will average just $4.4m for the same period.

How much will be paid out to the traders? According to Simon Maughan, of OTAS Technologies, in prior years traders could assume that their compensation would be based upon a large percentage of those revenues. For example, United States banks would usually allocate half of all revenues to be paid to junior and back office staff, with senior traders being allocated 20%-30% of the revenues they were responsible for bringing in. Today, Maughan says percentages have been modified to tie in capital allocation and risk-taking. Even with those changes, however, and with senior credit traders projected to be responsible for $7.4M each, a percentage of $13.5% seems reasonable.

However, the biggest revenues aren’t coming from traders, it’s equity capital markets (ECM) personnel not credit traders who are responsible for most revenues in 2014, with an average of $11m per person for 2014, an increase from just $9.5m in 2013. Below that, senior M&A bankers are farther behind with just $1.8m per head for 2014. M&A bankers will argue that M&A advisory services do not require a bank to expend capital, with very little risk outside of reputational risk. As a result, they are entitled to a larger percentage of the revenues they generate.

But the banks state that the real value is in their franchise; that is, the banks and their reputation attract clients. They question what portion of revenues are due to individual traders, or instead reflects clients wanting to work with a specific bank, or the bank offers the best M&A financing. According to Maughan, it doesn’t matter. “The reality is that people working in banks are very well paid in their jobs and the revenues they generate must have something to do with their individual input – although in my experience, when you take those individuals out of their big franchise, they have problems replicating their production.”

 

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