My bank is paying up this year — how do I get my fair share?

Dear AL,

You raise a perennial issue around compensation.

Let me state at the outset that contrary to popular perception, year-end compensation isn’t really based on performance. Management calibrates pay based on whatever it takes to retain you and to keep the franchise intact. If they can get away with paying you less, they will.

I know this sounds cynical but it’s a bedrock principle that you pay your team what you have to, especially when there are multiple competing claims on the bonus pool.

And then there’s the never ending debate about whether any revenue generated is attributable to you or the institution. Were you the “but-for” cause or did you just leverage off a platform that reflects tens or hundreds of millions of investment?

Nobody is going to believe that you were the driving force behind the SpaceX IPO. You were probably more the domestique in the peloton than Tadej Pogačar: you performed a lot of thankless but important tasks, but you didn’t wear the maillot jaune. Elon Musk doesn’t know who you are.

But that doesn’t mean you get no credit. Even after committing capital, your bank could not secure a senior role in the IPO without a credible ECM franchise in the first place. For that you need the full waterfront of capabilities: investment banking coverage, sector expertise, balance sheet, equity syndicate desk, execution expertise, equity research, equity sales, equity trading, and so on.

That franchise is worth something, and you are a part of that franchise. Sure, they could replace you tomorrow but there’s a cost and importantly you would need to be replaced.

So, you’re entitled to some reward from the SpaceX IPO but how much is less clear.

Banks do not have a formula of paying its ECM team a certain percentage of revenues generated, and with good reason. It takes a village to originate ECM business, not to mention the extension of credit on favourable terms in many cases (including SpaceX).

I worked for a long time in ECM and despite running teams for many years, I never really had a handle on how “profitable” we were. How do you allocate the various costs? How do you account for the cost of capital or the risk around that capital? We were judged on revenue and league table but even at senior levels it was never apparent what costs were attributed to us.

At the end of the day, the biggest swing factor for your compensation will likely be the overall performance of the investment bank. In good years, management gives you the benefit of the doubt. There’s more money to go around and so senior leaders can keep everyone happy. In tougher years, you have the opposite phenomenon. Management finds reasons not to pay as much, and they remind you of the cost of capital, the losses incurred in other divisions, and the need to invest. They magically discover that your seat isn’t that profitable after all.

Of course it’s not intellectually consistent but the goal is franchise sustainability, not cognitive coherence.

So how should you approach year-end comp discussions? Don’t bother saying you were underpaid in past years. You didn’t leave then and so management will (correctly) infer that you were paid enough to stay. You don’t get to claim a low-bonus “carry-forward”.

I’d focus on your current value. You delivered on various deals and this portends well for your future contribution. You should be paid because losing you would inflict inconvenience (or worse) to the team — the bank shouldn’t want to incur the replacement cost and all the associated frictions of recruiting someone new or promoting someone a bit ahead of time to fill the gap. It’s in their interest to keep you around and to keep you happy.

So it’s not that you worked hard and deserve a big payday. Everyone says how hard they worked. Rather, you need to convince them — with subtlety, without threats — that they benefit from your presence and would miss you if you were gone.

The comp pool may be larger than normal this year but that doesn’t mean you will get a big slice. Many people will be lobbying for their cut. Make sure your bosses know that paying you well serves their interests.

Yours,

Craig