So, people in finance are complaining about this year's bonuses, and resigning because their bonuses were more "disappointing" than expected. Surprise, surprise. - Or not.
Complaints about bonuses are endemic in finance. But complaints about last year's bonuses are particularly unjustified. When anyone in sales and trading or capital markets talks about their firm's revenues in 2020, and how much they were up from 2019, they need to remember that most of the increase came from the Fed and from other central banks lowering interest rates to zero and pledging support for the entire corporate bond market because of the pandemic. Jay Powell should get most of the credit for year-over-year revenue gains in 2020 at all investment banks!
In these circumstances, the only realistic measure of how a firm did in 2020 is changing market share. - Did your desk outperform rivals? If it did, well done. But if you grew revenues in line with, or by less than, the rest of market, then it's right that your bonus should fall.
Much the same applies to people in private equity, who benefit from payments of carried interest. They might work hard but high returns in PE are generally the result of the amount of leverage they can impose on companies and their investment horizons. Ideally, they want a highly leveraged firm with a 10 or even 15 year horizon so that they can work through a global, national or sector down-turn, restructure or recapitalize if necessary, and live to fight another day. - Is that really due to their own skill?
There are studies that show you can duplicate average PE fund returns (or perhaps even top-quartile returns) by putting the same amount of leverage that PE funds use on a simple S&P 500 index fund. And, of course, PE has benefitted from the long-term decline in interest rates and the long periods since 2008 in which rates have remained close to zero...
So next time you voice the opinion that you should have been paid more, take a moment to reconsider. Too many people in finance tend to think of their own good performance as brilliance. In fact, it's usually the result of a bull market in whatever financial instrument, sector, or commodity they work in.
Bryce Davis is the pseudonym of banker who's spent decades on Wall Street
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