There's a Good Reason Why Wall Street Is Overpaying Bankers

Few are saying it out loud, but it seems plenty of investment banking leaders think a big rebound in dealmaking and fundraising is around the corner. Even as advisory revenue at the biggest US banks has been at its weakest in years, a battle to keep rainmakers is bubbling away in the background.

James Gorman, Morgan Stanley’s chief executive officer, said it most clearly on Wednesday at the bank’s third-quarter results. There’s no need for the Federal Reserve to start cutting rates; companies and private equity firms just want to know they’ve peaked before they launch takeover bids or list companies.

“The minute you see the Fed indicate they’ve stopped raising rates is when the M&A and underwriting calendar will explode, because there is enormous pent-up activity,” Gorman said on the bank’s earnings call. “Unfortunately, I’m not going to be around to enjoy it,” because the bank is due to name his successor in the next few months.

His optimism failed to cheer investors. Shares sank as much as 9% after the bank said it produced less advisory fee revenue than analysts expected and saw an even bigger miss in wealth management revenue.

Still, there are signs of a hopeful outlook in the actions of many smaller advisory firms. Jefferies Financial Group Inc. expects to increase the number of senior bankers — also known as managing directors — by 20% by the end of this year, it said at an investor day on Monday. It actively hired in the previous two years as well. A string of others have also been on a recruiting spree in recent years, including Evercore Inc., Moelis & Co., PJT Partners Inc. and until this year Lazard Ltd., according to UBS Group AG analyst Brennan Hawken. The aggressive hiring could be helpful in the long term, but could mean higher compensation ratios — the share of revenue paid out to bankers — and lower returns to shareholders in the near term.

This activity is both spur and cover for big banks to boost pay too. Morgan Stanley wants to ensure it has the staff in place to tackle the hoped-for boom, so its staff costs have risen faster than revenue across the bank this year. In its investment banking and trading division, it boosted pay even though revenue fell in the third quarter, just like Goldman Sachs Group Inc. did — although the latter also had to mollify internal unrest.

Compensation ratios have risen at both banks as a result, hitting their highest levels since 2019 or before. Bankers are meant to be paid for performance, but banks are looking past this to a degree because the whole market has been so poor.

Business is Slow But Pay is Up