Why M&A bankers are undeserving and credit traders should earn $1m+

You’re a senior trader in a ‘leading investment bank’. Despite claims that it’s not really possible to earn millions in banking any more, you fully aspire to earn that. You still expect to be paid a reasonable proportion of the revenues you’re bringing in - even if the proportion you expect to be paid isn’t as high as it was, and even though you’re mostly acting as an intermediary for the bank’s own customers rather than taking any exciting positions of your own.

So, which products should give you the opportunity to earn $1m+in 2014? If operating revenues per head are any indication of pay, analysis by investment banking information company Tricumen suggests that senior credit traders are safely in the $1m pay bracket. Senior commodities traders are not. Nor are cash equities traders. Nor are the prime services professionals who lend securities to hedge funds.

Tricumen looked at operating revenues by product across major investment banks and calculated average revenues per head based upon full time front office headcount at vice president (VP) level and above.”We’re not taking into consideration the back office guys,” says Tricumen partner Darko Kapoor. “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.”

The results of Tricumen’s analysis are shown by circles in the charts below. In the first six months of the year, Tricumen estimates that credit traders have generated revenues averaging $3.7m each. All things being equal, by the end of 2014, they should be averaging $7.4m each. Equity derivatives traders should be averaging $4.4m over the same period.

How much of these revenues should trickle into traders’ pockets? In the old days, Simon Maughan, a banking analyst-turned head of the product specialist group at OTAS technologies, says it was reasonable to assume that a big percentage of revenues would be paid in compensation – U.S. banks typically allocated 50% of all revenues to staff (back office and junior staff included), and senior traders could eat 20%- 30% of whatever they killed. These days, Maughan points out that the pay-revenue dynamic has been obfuscated by things like capital allocation and risk-taking, both of which have entered the pay equation alongside high-level revenue figures. Nonetheless, with top credit traders each bringing in $7.4m this year, a 13.5% cut of that doesn’t seem unreasonable…

Traders aren’t the biggest revenue-generators

However, as Tricumen’s charts below show, it’s not credit traders who are the biggest revenue-generators this year. That accolade goes to equity capital markets (ECM) staff who it calculates are on track to generate $11m per head in 2014, up from $9.5m in 2013. By comparison, senior M&A bankers look undeserving – they’re only expected to generate $1.8m each this year.

In their defence, senior M&A bankers will inevitably argue that their advisory business doesn’t consume a bank’s capital and doesn’t involve any risk (other than reputational risk) – unlike ECM and unlike credit trading. On this basis, they will say that they should be paid a higher proportion of the revenues they generate.

In retaliation, banks will inevitably point to the value of their ‘franchise’. How much of these revenues are down to the efforts of individual bankers? And how much are down to the value of the ‘franchise’ – or the fact that clients want to do business with that particular bank, or that bank can finance an M&A deal? Maughan says it’s always a moot point. “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.”