There are many reasons why ‘banking’ is still lucrative career – and they have a lot to do with the fact that individual ‘bankers’ generate a lot of money for their employers. However, that amount is falling.
Finance research firm Tricumen has produced some figures showing just how productive people working in front office (revenue-generating) banking jobs actually are.
Tricumen looked at operating revenues per head in M&A, equity capital markets (ECM), debt capital markets (DCM), and various areas of securities trading (rates, foreign exchange, credit, cash equities, equity derivatives), along with commodities and prime services for the first quarters of 2016 and 2015.
It found that operating revenues per person in banking are still high, but that they’ve dropped a lot. Especially in ECM and credit trading (down 42% and 40% respectively), but also in M&A, equity derivatives and cash equities (down 20%, 20% and 17% respectively). Only in FX and prime services have operating revenues per head remained stable.
Ever since the financial crisis, revenues have played a smaller role in determining pay. However, their influence can’t be discounted altogether. Whereas most banks once paid 50% of revenues in compensation, that figure is now closer to 30-40%. At the same time, control costs have risen: a report this year from Morgan Stanley and Oliver Wyman found that control costs per person are now $300k, up from $200k in 2010.
It’s hardly surprising then that banking pay is coming down. The first quarter of the year is usually the most productive – especially in areas like fixed income. Goldman Sachs, for example, generated 42% of its 2015 fixed income trading revenues in the first quarter last year.
For a ‘banker’ to earn $1m when 40% of revenues are paid in compensation, they personally need to generate $2.5m+ over a year. As the chart below shows, far fewer people seem on track to do that in 2016 than in 2015. FX traders look most assured of success – and that’s just because their productivity is buffered by heavy investment in electronic trading infrastructure. The implication is that lot more people will be earning $500k+ this year and a lot fewer people will be earning over $1m.
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