It’s No Fun at Deutsche Bank

A good general model of working at an investment bank is that you come in and work hard all year for free, with the expectation that at the end of the year you will be awarded a big bonus that will fully compensate you for all that you did. This was never really true—bankers and traders always got perfectly healthy salaries, paid twice a month, in between their annual bonuses—and it is significantly less true now as regulators have pushed banks to make bonuses a smaller part of compensation (and salaries larger). Still it has a deep psychological hold on the industry. You get your “comp” once a year, and everything that you do is oriented toward making that comp as big as possible. And the comp has to be big, not only to compensate you for doing work and generating revenue, but also to compensate you for bearing the risk and delay of waiting a whole year to get paid.

One thing this means is that there are, as it were, high- and low-leverage situations for comp. The value of any trade to you is something like (1) the revenue from the trade times (2) the percentage of that revenue that will make it into your bonus times (3) the probability that you’ll actually get the bonus. And item (3) shifts over the course of the year. If it’s October and you’re generally in good standing with your bosses, you should chase every bit of incremental revenue: They’ll remember it when they allocate bonuses in a few weeks. If it’s March and the market is looking grim, your incentives are weaker: You might do a big trade now, be a hero for a bit, get fired in September anyway and never get your rightful bonus for that trade.1