***Update! Beat everyone to the real numbers for the second time in a row, Morgan Stanley cut by about 15% according to zerohedge and business insider. Heard it here first back in December***
We are updating compensation numbers for 2016. Excluded from this overview is investment banking analysts as the variability has not moved much. Simply put an investment banking analyst should make $150, $175K, and $200K in years one, two and three (plus or minus $5-10K depending on how good or bad the bank did). The reason we have excluded the exact break out of base and bonus is two-fold: 1) analyst base salaries are a bit less standardized now with $80-85K being the rough mid-point, 2) the bonus is being adjusted to match the all in compensation numbers of ~$150K, ~$175K, ~$200K. We made similar points last year, the only adjustment really is that most banks have moved to about 80 Base/70 bonus for the good analysts for a first year payout. Perhaps shave off $5K extra to be safe this year given that results were down again.
Budget Setting and Bonuses: As always, bonuses are set in Q4, despite being paid out around February-April, so it is relatively easy to get the Street range, this year bonuses will be down ~10-15%. This is better than the expected down 15-20% given the recent uptick in the equities market (4Q16), improvement in bank valuations (thank you Donald J. Trump) and improving fund raising markets (IPOs/Follow-Ons).
Not much has changed but a slightly lower bonus and the silver lining here is that the market is coming back a bit which *could* lead to better 2017 numbers. This is certainly far too early to call (2017 numbers) so we’re not going to make any predictions for 2017 since we stick with what will happen once numbers are set.
This year the industry should be down ~10-15% on the bonus line, we’ll take a slightly bullish stance and unless you’re at a struggling bank we assume down 10% or so makes sense.
Generally, the lower level (excluding new hires who have only been around for 6 months), will see less of a hit. Banks view junior employees (anything below Vice President) as fixed costs so they typically don’t take a big hit. As a reminder we’re attempting to build a picture across the Street which includes everything from bulge brackets, elite boutiques and middle market firms (excluding the extremely tiny shops that have minimal deal flow).
Reminder of Wall Street Being Poker: If you look at the numbers, you’ll see that the real money is made at the Vice President (more likely Director) and beyond level. This is because Wall Street is no different than playing in the World Series of Poker. We’ve said this before but it needs repeating. No one is going to get rich working as an associate and you’re only making money at the revenue generating role and more specifically once you close a few deals (Directors typically have brought in some money). In addition, once you reach Director level or even Vice President you’ll quickly realize starting your own company will make you more money than working for someone else (hint, hint, hint, never put all your eggs into Wall Street).
If ~$300K seems like a lot of money, look at the real math. If you live in a major city like NYC, then you can roughly assume you get ~$65K per $100K gross made. This means you’re getting $16.25K per month. Rent alone is going to run around $5K if you’re living in a good part of town and the rest of your living expenses will usually approach $4K a month or $9K in spending per month… Saving $80-100K a year isn’t going to get you anywhere soon. Once you hit $500K or so, then you’ll see an inflection as a single person because you can put away $200K+ and not see much of an impact to your life style.
Reminder that there is No Such Thing as Passive Income… Just Net Worth: No matter what people tell you to market their ideas, passive income is just a fancy word for cash. If you have to spend time to earn the income then it is *not* passive because you’re using your valuable time. So if you can put away $200K a year or so and assume that you can get 5% off a diversified portfolio, then each year you’ve earned $10K in secure income. Assuming you want to live a normal easy life in a big city as stated above, then you’ll need about ~10 years of savings to get there, where you generate $9K+ without lifting a finger. Of course this will get boring which is why you have to start a business and get out of Wall Street or any type of employment as soon as possible. The bright side is you only have ~10 years to work no matter what in a worse case scenario.
How Do You Calculate Your Bonus as a Revenue Generator? You will get around 10-15% of what you kill. This is the rough math and makes all those occupy Wall Street people scoff and get on their knees. To generate a $1M bonus you’d need to bring in $10M to the top-line at the firm, roughly speaking. This is certainly not an easy task and most people will get stuck in the $300-400K bonus range where they get some small deals, sign up some retainers, some poison pills, some fairness opinions etc… but never really get the big money.
Nothing has Really Changed… The number of slots available has continued to shrink on a relative basis. The roles remain unchanged. Analysts and Associates stick to supporting the senior staff and the Associates with sales skills are shoulder tapped to become Vice Presidents if they have the intangible skills necessary to generate revenue. The Vice Presidents either move up quickly or get blown out like Hillary Clinton. The Directors are usually stable and keep angling for ways to become Managing Directors without getting fired for trying to snipe clients from the current MDs… the MDs continue to chase the biggest deals possible and angle for becoming the head of investment banking.
The Buyside is Still Seeing Pressure: For another year, passive investing has outperformed active managers impacting the number of roles on the buyside at hedge funds & mutual funds. Private Equity has seen low rates help their investments (this may change if rates continue to go up) as cheap money has improved the ROIs on investments particularly if the debt is set at a fixed rate.