With 2023 underway, investment banking bonuses have emerged as a hot topic on Wall Street. After record highs in 2020 and 2021, expectations for bonuses are more muted this year amid a turbulent economy and volatile markets. Though details remain scant, most experts predict lower bonuses in investment banking for 2023 compared to recent years. Several key factors will shape bonus outcomes, namely economic growth concerns, dealmaking slowdowns, and ongoing inflation/interest rate hikes. Major players like Goldman Sachs and Morgan Stanley are approaching bonus season with caution. Though specifics are unclear, diminished bonus pools seem imminent. For junior bankers, bonus declines may be less severe as banks aim to retain talent. Overall, 2023 investment banking bonuses will likely see reductions, but remain healthy given the lucrative field.
Slowing economy and markets weigh on 2023 investment banking bonus outlook
The most significant factor tempering 2023 investment banking bonus expectations is the slowing economy. With GDP growth expected to cool in many regions like the US and China, dealmaking activity has slowed considerably. Likewise, volatile equity markets and rising interest rates have discouraged IPOs and acquisitions. This softness directly impacts investment bank revenue, the primary driver of bonus pools. While M&A activity could improve later in 2023, the difficult start to the year will likely translate to weaker bonuses.
Diminished dealmaking in 2022 signals lower 2023 investment banking bonuses
Investment banking bonus pools depend heavily on fees generated from advisory and capital markets transactions. In 2022, dealmaking declined substantially across most products as volatility spiked. Global M&A value dropped around 37% year-over-year, while IPO proceeds fell 86%. With fewer deals in 2022, investment banks simply made less money, leaving less available for bonuses. Though future activity is hard to predict, the weak finish to 2022 does not bode well for 2023 bonuses.
Inflation and interest rate impacts cloud 2023 investment banking bonus environment
Persistently high inflation and rising interest rates also cast uncertainty over 2023 investment banking bonuses. Despite aggressive tightening from central banks, inflation has remained stubbornly high. Higher costs eat into consumer demand as well as companies’ willingness to pursue deals and raise capital. Meanwhile, rising interest rates increase borrowing costs and discourage dealmaking. Until inflation moderates and rates stabilize, challenges will linger for investment banks, translating to lower bonuses.
Major banks like Goldman Sachs and Morgan Stanley take measured approach to 2023 bonuses
Leading investment banks are clearly adopting a more cautious stance on 2023 bonuses amid the uncertain backdrop. Goldman Sachs CEO David Solomon and Morgan Stanley CEO James Gorman both acknowledged that 2023 bonuses will need to come down. Though details remain vague, Goldman is reportedly considering cutting bonus pools by as much as 45%. Banks must balance retaining talent with preserving profitability. Given recent revenue declines, a pullback in bonuses appears inevitable. However, banks will likely make efforts to shield junior staff from the brunt of the cuts.
In summary, 2023 is poised to be a more challenging bonus environment for investment bankers compared to 2020 and 2021’s banner years. Slowing economic growth, diminished dealmaking, and inflation/rate headwinds will likely translate to reduced payouts. Major investment banks are already signaling lower bonus pools, though specifics remain unclear. For junior bankers, declines may be less drastic as retention concerns persist. Overall, bonuses will remain healthy but subdued amid the turbulent economy and markets.