NEW YORK: When it comes to doing deals, Wall Street’s masters of the universe couldn’t be in a better spot to negotiate for themselves. Corporate finance activity is booming, and investment banks say their biggest impediment to getting transactions done is an absence of people to execute them. That gives bankers bargaining power as their employers stare down pay inflation. Evercore (EVR.N), the advisory firm, is showing how to thread that needle for now. The key will be keeping its top dogs.
Compensation expenses at the $6 billion shop run by Ralph Schlosstein and John Weinberg jumped 33% to $803 million in the first half compared to last year. That’s a bigger increase than at JPMorgan’s (JPM.N) corporate and investment banking division during the same period. At the company led by freshly incentivized Jamie Dimon, compensation expense rose 13%. They increased 16% at Morgan Stanley’s (MS.N) institutional securities division.
As a percentage of the top line, Evercore is shelling out far more, too, which makes sense given its business mix. In the first half of the year, the compensation ratio, a reflection of pay-to-revenue, was 60% – around the same that rival Moelis (MC.N) paid out. That compares to over a third at Morgan Stanley and less than 30% at JPMorgan. For Evercore’s lot it’s a reflection their toil is being rewarded.
Yet happily for Evercore shareholders, the ratio is going in the right direction. The comp ratio fell from 65% in the first half of last year. Firms like Evercore, however, may be more vulnerable to the fight for talent than large banks since winning juicy advisory mandates is highly reliant on senior bankers with top-notch corporate and government relationships. Ever since the financial crisis, Evercore and its ilk have been beneficiaries of talent leaving increasingly regulated big financial institutions.
The key for firms like Evercore is to retain a cushion between rewarding rainmakers more robustly during the boom while leaving something for shareholders. That way, when the market slows, the compensation ratio can rise, pay can still be relatively higher, and bankers will feel appreciated. As Evercore ponders its own generational succession plans – Schlosstein’s wife, for instance, may be the next U.S. ambassador to London – getting this balance right is essential.
