For people on the outside looking in, obtaining an Investment Banking job represents the equivalent of winning the earnings lottery. Six-figure bonuses, a strong starting salary, generous signing bonuses, comprehensive benefits, and fast-track promotions are par for the course. Candidates believe that once they get that Investment Banking job and become a member of the club, they are set for life, at least financially. The next steps after banking—private equity, hedge funds, corporate strategy—are foregone conclusions.
Curb Your Expectations
For the lucky few, what I have just described is exactly what it feels like to get compensated at an Investment Bank. What you usually don’t hear about, however, is the fact the highest bonuses (the ones you read about in the Wall Street Journal) are only allocated to the highest-rated performers consisting of the top 10% (sometimes just the top 5%) of all employees across a firm in a given year. As for the stories you hear that might include astronomically-high year-end bonuses, well, that generally happens under perfect market conditions and again will only be awarded to the top-rated bankers.
The unfortunate truth about Investment Banking salaries to those who believe that the path to independent wealth starts with an M&A job at Goldman or Morgan Stanley, is that more often than not, the pay that they would actually receive will fall well under the expectations they set for themselves going into it for the first time. The effect of taxes is quite often and painfully underestimated by candidates and if that person happened to be in the business or entering during a downward cycle in the economy it can feel downright unfair.
This piece sheds some light on Investment Banking salaries to give candidates a reality check of what to expect as an average performer. It’s easy to get mesmerized by the huge bonus numbers your banking friends might tell you they’re expecting at the end of the year, and is the main reason why you want to sign up and apply for a job this fall. However, the fact is the chances that one of your friends will actually receive a “tier-1” bonus are relatively low. Getting ranked in the top 10% of all analysts, associates, and VP’s is quite difficult and a veritable achievement for those who earn it. The survivorship bias that seems to be so prevalent in casual conversation among insiders about Investment Banking salaries can set unrealistic expectations. The observations I make below serve as a reality check for you on what salaries can be really like by level if you fall under the middle of the performance bell curve. Disclaimer: my view is from the perspective of a person in a typical corporate finance / M&A job – realize that salaries can vary significantly by function and individual between IBD, Sales & Trading, and Equity Research.
Investment Banking analysts can expect to earn at least $60K-$65K in first-year salary. Multiple sources on the web and my own insiders currently at the banks report that the starting figure has risen to $75K across the Street, which could certainly be true, but to keep one’s expectations in check, forecast $60K to err conservative if you are planning to apply for an Investment Banking job.
$60K is a solid starting salary for a 22-year old fresh out of college but let’s do some quick math to see what $60K can get you in New York City. If an analyst chose to live “big” and reside in Manhattan in a decent neighborhood, say, Midtown West, the cost of renting a standard cookie cutter one bedroom apartment in a full-service high-rise has risen to upwards of $3,500-$4,000 per month. As a point of comparison, the cost of a standard one-bedroom just six years prior was closer to $2,750. Assuming that my hypothetical 22-year old first-year analyst takes on a roommate to share the burden of paying for a one bedroom Manhattan apartment for $3,500, the rental cost for one year is $21K. Starting at $60K and assuming a tax rate of 35% (state, federal, and city tax, etc.) that leaves $39K in net pay. $39K-$21K is $18K, divided by 12 is $1,500 per month or $375 per week in “disposable” income to cover utilities, food, and entertainment. Because the cost of living is so high and continuously rising in financial hubs all over the world, first-year analyst salaries don’t feel so great if you really want to reap some of the rewards from all the hard work it took to get that Investment Banking job in the first place.
I know what you are saying – “What about the year-end bonus. You are not counting the analyst’s year-end bonus.” OK, let’s add it then. At a $60K starting salary, many assume a 100% bonus. As I mentioned earlier, you just cannot assume this. The analysts who actually receive the full 100% bonus are the best of the best, and few and far between, by definition, no matter what your friends say or how easy they make it seem to get a top rating. The average analyst subject to the bank’s forced curve can realistically expect about a 35% bonus (and for analysts ranked toward the bottom, receiving NO year-end bonus is a distinct possibility). This is the painful but more realistic, truth. Tax rates on year-end bonuses are closer to 50%, to that 35% bonus equates to $21K before taxes, and $10.5K after taxes (or $875 per month, $175 per week). Clearly, I’m using very simple math and broad cost and tax withholding assumptions, but this is just to illustrate a conservative view on what to expect.
As analysts progress to a second and third year, 10%-20% salary raises can and do happen but again, is highly, highly dependent on an analyst’s individual performance. It is certainly possible to be completely passed over for a salary adjustment when the market is struggling or if your personal performance simply did not meet or exceed expectations. Directly put, to the highest rated few go the majority of the spoils in Investment Banking, and this is true at every subsequent level up.
Investment Banking salaries at the associate level can vary significantly depending on whether or not the person earned an MBA or made it as a direct-promote. Career-switchers fresh out of a top business school program can expect to be offered signing bonus in excess of $50K and a starting salary in the six figures. I am hearing that banks are now paying $125K to $135K for first-year IBD associates. Direct-promote associates can see a significant salary bump to be in line or equivalent to their MBA-toting counterparts, but I’ve heard of associates in this category earning only slightly above their third-year annual analyst salary in the range of $95K-$105K.
Year-end bonuses for both types of associates can go beyond 100% but what did we learn? Only the highest, top-rated performers can expect it. So, to be safe, assume that the average performing IBD associate will receive a 50% year-end bonus. In exchange for enduring the physical toll of back-to-back-to-back-to-back 120 hour work weeks compounded by the VP demands and MD pressure to be 100% perfect 100% of the time (even on 50-page profile decks), a 50% bonus rate can seem painfully inadequate.
I asked a friend who recently exited the business about compensation at the associate level and here is what she said based on her personal experienced at a major bulge bracket:
“Associate salaries can vary depending on the bank and your performance. Each bank does their own market research and sets the base and bonus pay to be ‘in-line’ with market but sometimes they get it right and sometimes they get it wrong. Depending on the bank, associates might get their compensation ‘adjusted’ if the bank realizes that they have missed the market average.
As you advance through the associate years, your performance ranking can affect your bottom-line significantly. In order to be top rated, you will have to perform at the ‘next level’ and doing your associate job really well doesn’t necessarily get you the top rating. You are expected to do your job well so if you are good at what you do, you will get an ‘average’ rating.”
The key takeaway from my friend is what she said at the end: “You are expected to do your job well,” suggesting that performing at a high level is par for the course. If high-level performance is equal to par, what does it take to earn that tier-one rating and the elusive 100% bonus? Well, you essentially have to be functioning above your pay grade, and also be performing at an elite level. This bit of insight from my friend is the exact reason why I recommend someone considering a career in Investment Banking to carefully and conservatively forecast the pay they can expect realistically expect when they enter the business. It is simply statistically difficult to get that top-top-top rating the higher up the IBD corporate ladder you go and requires significant commitment and effort to get there.
I applaud every associate who succeeds at this level and earns above average ratings and therefore becomes in line to receive the lion’s share of the bonus pool from his or her firm. They typically really, really deserve it, especially from the amount of hours they’ve put in, the pressure they survived, and the labor they provided. Banks do not indiscriminately hand out huge bonuses to just anyone – they examine individual performance very, very carefully, and for the most part, get it right. From a gross figure perspective, the average associate all-in annual compensation is about $170K. After taxes and deferred compensation eat up 60% to 70%, however, the amount of actual cash that goes into that associate’s checking account can feel awfully and woefully inadequate.
Vice President to Managing Director
One of the biggest revelations you will ever have in your finance career is the importance of reaching the Vice President level at an Investment Bank. At this level, a person should find that the amount of compensation earned in salary + bonuses less taxes and deferred income should be enough to make one “feel” like they are earning a high salary from a practical perspective rather than a romanticized point of view concentrating on gross rather than net pay. Indeed, accounting for the effect of taxes and deferred compensation on an Investment Banking Vice President’s total compensation yields a monthly disposable figure number that should feel truly “disposable” to the employee for the first time.
Read More: Inside The Life of an Investment Banking VP
Typical all-in compensation totaling up to and over $400K (salary plus bonus) per year of gross income is reasonable and in fact not out of the ordinary and should enable an individual to save more than adequately for retirement and live relatively more comfortably in a high-cost city like New York, London, or Hong Kong. For the sake of simplicity, I am aware that I am conveniently not taking into account the added cost of having a family or unexpected healthcare expenses. My view on Investment Banking salaries at the VP level considers only the individual and no other dependent.
The same observation I made about top-performers earning the top bonuses still applies at the Vice President level and beyond – the average Managing Director at a major global investment will indeed pull in over a seven-figure total comp number in one calendar year. Experts generally agree that the average is $1.2M (yes, million) for the non-group-head MD at a bulge bracket firm, a figure affirmed by the MD’s and SMD’s (Senior Managing Directors) I’ve known who didn’t hold back on the truth. If you can reach the MD level you are doing quite well financially, and there is no way that I can make any kind of assertion otherwise that I can reasonably defend (nor would I attempt to do so). If you can make it to MD, congratulations, you are winning.
Earning the highest Investment Banking salaries is fully contingent upon one’s performance on the job and really nothing else. This is the blunt honest truth. If you are in the business already, and you have yet to go through a bonus cycle, you will receive information from your department head and HR rep a few months before year-end explaining in legalese how bonus numbers are defined, based on, and dependent on four components (usually in order of importance): 1) your individual performance, 2) your department’s performance, 3) the firm’s overall performance, and 4) the overall market (i.e. competitor banking landscape and compensation trends). You are also given official word that these four factors equally impact your final bonus number. If you’ve ever gone through a bonus season, you know that the fact of the matter is, your rating is the only thing on the planet that determines your end-of-year bonus–everything else is just a smokescreen.