Pay is rising at Greenhill, but there could yet be bad news for juniors

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Boutique investment banking firm Greenhill has had some well documented issues. There was the rush for the exits by senior staff and the fact that the firm's market value shrunk below $500m this time last year. In an effort to put the bad times behind it, Greenhill has been working hard (and hiring lots of new people). Yesterday's second quarter results suggest it may have turned a corner.

In the second quarter of 2018, the revenues Greenhill earned from advising on M&A deals rose 30% on the same period of 2017.

It's safe to assume that some of this revenue growth was down to hiring. James Mitchell, an analyst at Buckingham Research, points out that Greenhill has added 10 managing directors so far this year, including senior people from Rothschild, J.P. Morgan and Deutsche Bank. Thanks to seven senior staff exits, however, Mitchell says the net number of new MDs is up by only three people on 2017.

Even so, that top-level hiring has driven up pay. In the first half of the year, Greenhill's total compensation spending rose by $15m, or 18%. The firm doesn't release mid-year headcount figures, but based on employee numbers from December 2017, it likely has around 80 managing directors and 350 staff in total.

With a six month compensation spend of $97.6m, this implies that Greenhill has accrued $279k per head in compensation so far. With luck, it might pay the average employee close to $560k for the full year.

That's nice. But there's a potential fly in Greenhill's ointment. - The firm is also super-keen to hold compensation down as a percentage of revenues. In the first six months of last year, compensation ate up 67% of revenues at Greenhill. This was a lot less than the current norms at Evercore and PJT Partners, but it wasn't something Greenhill was happy with. - In its 2017 annual report, Greenhill explicitly declared its intention of getting compensation down to between 53% and 55% of revenues. It achieved that in the first six months of 2018, when compensation was 55% of the revenue total. 

If you're a junior at Greenhill this may not bode well. After all its exits, Greenhill needs to demonstrate it can keep its new managing directors to prove to investors that it doesn't have an MD retention problem. This will mean paying them handsomely at year end.  If compensation is to be held down as a percentage of revenues, guess who will suffer if revenues don't come through?

With revenues rising 30% in the second quarter, this isn't exactly an issue right now. But Greenhill's juniors need to hope those new senior staff can keep the deals coming for the rest of the year. They might also hope that Greenhill adds some new people at the bottom as well as at the top. -  At the end of 2017, Greenhill had an average of 4.5 juniors to every managing director, down from its long term average of 5. The lower the number of juniors to MDs, the more work each junior has to do. And with Greenhill's MDs and revenues both rising for the moment, juniors are in danger of finding themselves far, far busier than before.

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