Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a managing director at Frontline Analysts and author of “The Unaccountability Machine”
“I didn’t see any of the shareholders putting in 80-hour weeks,” as the saying goes in investment banking. In the industry, there is always a delicate question of whether the money made ends up going to providers of human capital or financial capital. In a year in which profitability has been unexpectedly good, this might all turn on questions of internal politics.
Way back in April, it was possible to see that the unusual way that investment banking industry revenues were shaping up was likely to be a source of political tension in a lot of the big franchises. And now we can sit back and enjoy the action.
The consultants at Johnson Associates have estimated that the bankers who have most reason to be cheerful going into the compensation season would be those in equities sales and trading. They are on course to generate revenues up 15 per cent on last year according to Coalition Greenwich, compared with 8 per cent growth for advisory bankers (including capital market operations) and fixed income traders.
It has been a great year in the equity markets, as the “right kind of volatility” has been a constant presence, with few big market crashes to generate big losses and (so far) no embarrassing blow-ups in prime brokerage or derivatives. So the traders will have, for the most part, excellent personal profit and loss accounts, and will expect to be paid accordingly. Johnson Associates estimates that its bonus pools will be 15-25 per cent higher than in 2024.
But despite the industry’s reputation, bonuses are not wholly determined by individual performance. There are good reasons for this. Too direct a link between revenue and pay can create bad incentives; employees who have already made a lot will tend to “bank their risk”, while those who are underperforming might “gamble for redemption”.
And a well managed bank will not want to risk a single bad year for a strong business unit turning into the start of a spiral if all the good people are disappointed with their bonuses and leave. So it’s accepted that there will be burden-sharing and income-smoothing between the divisions, including some annual transfers across the dividing line between the two great tribes of banking, the traders and the advisory bankers.
But sales and trading business units of all sorts have a structural problem when it comes to these negotiations. They lack a “pipeline”. Like retail or hospitality, many trading businesses start the day with an empty cash register and have to do their best to fill it, then start from zero all over again the next day. It means that they are quick to recover after a bad period, but the future is never certain.
M&A and capital markets business lines, on the other hand, work on transactions that could take weeks or even months from winning the mandate to “revenue close”. So they go into the meeting room at the end of the year prepared to either talk about all the revenue they’ve generated in the recent past, or all the revenue that they’re going to get in the near future. Whichever looks best.
In the case of 2025, it seems unlikely that many advisory bankers outside capital market operations will feel satisfied with a bonus that’s only up 10 to 15 per cent on last year, as Johnson Associates was predicting. After all, they had a very strong third quarter, leaving year-to-date global M&A volumes up 41 per cent. Admittedly, this is because of an outsize contribution from the tech sector and from North America. And the mega deals which have driven up the headline numbers do not always carry the same generous fee margins as the private equity transactions that have driven profitability in previous years.
But the fact that things have accelerated allows the advisory bankers to claim they have a huge opportunity in 2026, if they are just allowed to pay their people properly. After all, wouldn’t it be galling to lose a load of your best bankers due to a disappointing bonus season, and then miss out as a result?
Unfortunately for sales and trading divisions, arguments like this tend to carry a lot of weight. This is why equities people tend to be used to disappointment — in the good years, they are always asked to share the wealth, but in the bad years there’s rarely any reciprocation. The best that the divisional managers can usually do is spread rumours that they have to match the hedge funds or risk losing their best traders.
It’s a tactic which usually fails, but when it does the only people left to pick up the bill are the shareholders. So banking sector investors ought to be hoping that, once more, the perpetual Cinderellas of the investment banking industry don’t go to the ball this year.
