We are updating the total Investment Banking compensation numbers for 2018. Excluded from this overview is investment banking analysts as the variability has not moved much. Simply put an investment banking analyst should make $160, $185K, and $210K 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 $85-90K being the rough mid-point, 2) the bonus is being adjusted to match the all in compensation numbers of ~$160K, ~$185K,~$210K. We made similar points last year, the only adjustment really is that most banks have moved to about 85-90 Base/ 70-75 bonus for the good analysts for a first year payout (as usual 100% of base as bonus is reserved for the top-tier performers). Perhaps add an extra $5K to be safe this year given that results were up slightly (no one is going to get rich with that extra $2.8K after tax income).
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 up ~6-8%. This is better than expected with results actually going up despite the market calamity. One interesting item here is we wouldn’t be surprised to see banks defer more money and potentially take the 6-8% up down to 4-6% to adjust for what appears to be a rough market outlook (either way this doesn’t change the amounts much).
As an important note, not much has changed in terms of base salaries (we’re adding a small amount to gross up the average) and bonuses were up decently this year. This year the industry should be up and we’ll go ahead and say that’s the general consensus. Now it all sounds good until you hear the following: “Eat and Kill Disparity Increases”. Similar to a trend over the last two years that we have been mentioning, the difference between top paid people and bottom paid people is increasing. If you’re at the bottom you could even see a “F You” bonus comeback ($0 to $10K) and the top paid people will do significantly better than the table below (more details later).
What is a Top Person: A top person is someone that is either generating a large amount of revenue or someone the firm is promoting. The first one is obvious and people who are working on the larger deals are typically the ones being promoted anyway (funny how that works!). Essentially, a top person is someone who is already generating a ton of money or someone who works for a guy generating a lot of money. If you’re a good junior banker the top person will want you on his squad, simple as that.
Overview: Generally,the lower level (excluding new hires who have only been around for 6 months),will see less volatility. Banks view junior employees (anything below Vice President) as fixed costs so they typically don’t see much volatility. As are minder we’re attempting to build a picture across the Street which includes everything from bulge brackets, elite boutiques and middle market firms(excluding the tiny shops that have limited deal flow). If you look at the numbers, you’ll see that the real money is made when you’re generating revenue(Vice President, Director, Managing Director). 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 assume that you’ll see about 64% of what you make (figure is around ~$192K). This means you’re getting around~$16K 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 around $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.
Before the Debate Begins: The “average” or “median” is becoming extremely difficult to calculate. Why? Well more and more of the top people are paid more and the bottom tier people are being asked to leave via a terrible bonus. The strategy of making sure you’re barely in the top quartile is material. You absolutely do not want to risk being in the middle anymore as it swings your pay down by a wide amount. To give an example, while the “average” Vice President makes around $500K, you could easily make 50% more if you’re at the top (yes that’s a quarter million dollar difference or more!). This difference only gets bigger and bigger as you move up the chain. Also. If you are the same Vice President but you’re awful at your job, you’ll receive a fast and swift “F You” bonus that could cause you to make less money than you made as a top tier associate(okay easily could). The “conference room” will be the next call.
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.
Things Have Actually Changed!You’re seeing a bigger and bigger change between banks. When looking at the chart we have to emphasize that there is a big difference between being at Joe’s Investment Bank and a top tier Boutique. This will cause a lot of people to look at the chart and say “that’s way too high” (bad bank or group) and the top banks to say “wow that’s terrible I am never leaving here”. We can’t decide if this is a good thing or a bad thing but one item we will say… We’ll make a bet that numbers actually pull back over the next two years. This is in-line with our general market belief we outlined last post. It won’t go to 2008 levels but we doubt the numbers are up over the next couple years.
The Buyside Story 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.Interestingly, just now the Fed increased the interest rates making the math harder to make sense. This has been a constant and you’re going to see headcount reductions at hedge funds and long only funds. You have already heard of several if you follow financial news.
Key Way to Avoid Confusion: If you’re looking for one line, just assume you’ll be up 6-8% at least on a “like for like basis”. Given all the base salary changes we adjusted them throughout all levels to reflect the evolving environment. This means some of the totals look better than the other ones depending on *when* the base salary was moved up for the group. Also, remember that getting a promotion usually leads to bigger jumps and if you were simply going from associate 1 to associate 2, not much happens and that would be reflective of a “10% like for like” jump.
The Next Q&A Will Be On December 27, 2018.