3 Reasons Why Banking Bonuses Are a Big Deal

Can bank employee bonuses be a sign of things to come?

Banking bonuses, or the amount of money paid out to top executives and employees in the banking industry, can range from hundreds of thousands of dollars to even millions of dollars for high-performing bankers. Annual bonuses rise and shrink based on the economy, and with bonuses expected to drop by 50%, 2022 was not a good year for banks. As banks struggle to remain profitable in the face of the COVID-19 pandemic, here's what it can mean for you.

Why have bonuses declined?

Banking bonuses are an indicator of how banks are performing financially. For Wall Street, these bonuses are offered in addition to regular salaries and wages and can be several times the base pay. When bonus pools increase, it indicates that banks are doing well and are able to pay out more money to their employees in recognition of their accomplishments. Conversely, when bonus pools decrease, it usually indicates that the bank is struggling financially and is unable to provide its employees with additional compensation beyond their salaries or wages.

With interest rates skyrocketing, investment banking revenue has dropped by more than 50% from the previous year. Mergers and acquisitions, companies going public, bank loans, and other banking activity has decreased significantly. As reported by the New York Times, Instacart pulled its plans to go public in 2022 as its valuation was slashed from $40 billion to $24 billion. With rising inflation, the war in Ukraine, and fears of a looming recession, Wall Street has taken a more conservative approach this past year.

What does it mean for average consumers?

For average consumers, banking bonuses may not seem like a big deal; however, they can still have an impact on everyday life. First, if a bank's bonus pool decreases significantly due to economic struggles, this could indicate tough times may be ahead. Second, higher interest rates make it more difficult for people looking to purchase homes or cars or start businesses, as lending options become limited or more expensive.

Lastly, this can be problematic for both the bank itself and its customers since it could mean less money available for offering personal loans or other bank services. Banks have had to reduce employee bonuses or decrease other spending in order to preserve cash reserves, making it harder for them to expand their operations or offer new products or services. This may limit what customers can access and can impact the overall health of the banking system.

All in all, banking bonuses may be an indicator in determining the financial health of a bank as well as the economy in general. Even though it may not seem like much at first glance, understanding how banking bonuses work can help us get a better idea of what's going on behind the scenes at large Wall Street banks as well as local banks. This may mean that financial stability of banks may also be at risk and could lead to decreased availability or reduced access to banking services for the average consumer.