Based on this analysis, I concluded that bonuses would be down 20-30% overall:

“…But if I had to guess, I’d say that bonuses will be down 20-30% overall. Something in the range of $60-75K for 1st Year Analysts’ top bonus seems reasonable.”

So I don’t see why anyone (at least anyone who read the post) was particularly surprised at the outcome: top bonuses for 1st Year Analysts were indeed in that range.

The Numbers (In Case You’ve Been Hiding Under A Rock)

For those not in banking / those who did not already hear, top 1st Year bonus this year was $65K and top 2nd Year bonus was $85K. Those are down from $90K and $115K last year, respectively.

Below that, “2nd tier” bonuses for 1st years were in the $50-55K range and 3rd tier bonuses fell by another $10-15K.

Beyond that, 4th tier bonuses consisted of being shown the door (or The Conference Room).

I don’t know what specifically each bank paid everyone, and I’m sure there were slight differences in the tiers at different places as well.

But the main point is that bonuses were down 20-30% overall, just as I predicted based on banking revenue.

Why You Shouldn’t Be Disappointed

Over the past week many of the Analysts in my office had been complaining that bonuses were “so low” this year and that they fell off a cliff compared to last year.

Those points may be true, but “only” making $125K (or anything in the six-figure range) is still an absurd amount for a 23 or 24-year old who is just out of college.

I would also point out that back in 2005, top 1st Year bonus was $60K. Even with all the economic problems this year, bonuses were still higher than they were in 2005!

I actually thought bonuses would drop even lower, given how slow dealflow had been over the past year and how little “real work” I had done (one of the reasons I had the time to create this site…).

Why Now Is Actually A Good Time To Enter Banking

I’ve seen some comments that right now is a “bad time” to enter investment banking (or anything in finance) because the market is terrible, bonuses are down 30%+, and people are getting laid off or transferred.

I actually disagree with this and think it’s a good time to enter the field - assuming you can get in.

Markets - whether real estate, the stock market, or the job market - are always best to “buy” into when they’re at their bottom… and that is where we’re at right now (though some argue it could fall even further).

The advantage of getting in now is that a few years from now you can ride the wave at a much higher-level position and take advantage of significantly higher bonuses when the markets recover.

Sure, an Analyst might earn a $90K bonus when times are great (last year) and $65K when things go downhill (this year), but what about VPs and up? The difference there might be in the hundreds of thousands per year.

If you’re just testing the waters and are planning to move onto something else after a few years of banking, then now may not be the best time to enter the field (wait for the boom…).

2009 Outlook

Whenever bonus numbers for a given year are released, the next question on everyone’s minds (aside from how they will spend their new-found cash) is what next year’s bonuses will be.

I certainly don’t think they will be up much, if at all.  The most likely scenario is flat to down slightly, though if the bottom really drops out of the economy, bonuses could fall more than “slightly.”

Some Updates / Clarifications

I’ve been receiving a ton of email lately on the site and my plans and just wanted to clarify a few points:

1. I was not at Morgan Stanley and am not going to KKR in August - that was just what I wrote as a “sample” boring goodbye email in my last post on farewell emails. Besides, I worked at UBS LA, remember?
2. Even though I finished up with banking last week, the site will continue (some readers asked if it was shutting down because of the farewell email post the other day).
3. Even though I’m expanding the site and will be offering additional services/products beyond the resume review, the free content will continue as well.

So if you have a question besides those 3 feel free to contact me.

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-Bonus Season, The Leveraged Sellout (note: these refer to 2005 bonuses)

So the question of the hour (and all the 1st Year Analysts have been asking me about lately) is what 2008 analyst bonuses will be.

You might have seen the spreadsheet Dealbreaker posted awhile back on expected bonuses (the sources are all either “Staffer,” “Rumor” or blank, so this is obviously reliable information).

Some variant of this spreadsheet floats around every year, and it’s always overly optimistic. Over the past few years, though, bonuses were close to predictable because M&A activity was up each year, investment banking revenue kept rising, and America wasn’t in danger of being sold to China.

No one knows what’s going to happen, but we all like to speculate. And hey, I work in the industry so I must know something more than the average person, right? Right?

How Bonus Numbers Are Actually Determined

Before getting into why I (almost) believe the numbers in the spreadsheet, keep in mind how banks determine bonus numbers: they tie total compensation to a percentage of revenue (usually around 50% of revenue is paid out in compensation) and look at what everyone else on Wall Street is doing to make sure they’re in-line.

The 50% number above refers to total compensation for all employees - so it’s difficult to separate out what % is allocated to Analysts, Associates, and so on vs. what is allocated to senior bankers and even to middle and back-office guys (yeah, they get paid too… if things are going well).

Still, the basic point is simple: if revenue is down 50%, bonuses are unlikely to stay the same (unless everyone else is doing fine and keeps their bonuses the same… then yours might stay the same as well).

The Cold, Hard Numbers

In this bonus debate, very few people have actually relied on numbers to assert their views. So I’m going to change that and look at actual investment banking revenue this year vs. last year, for a mix of bulge bracket and middle-market/boutique firms.

Analyst bonuses are paid based on 6/30 TTM (Trailing Twelve Months for those of you not in finance) numbers, and while 6/30 quarterly figures for banks are not yet out, we can get somewhat of an idea by looking at 3/31/2008 trailing nine-month figures and comparing them to 3/31/2007 numbers.

As I read through the filings for some of these banks I started laughing because declines of over 100% were marked as “NM” (”Not Meaningful” for those not in finance yet). Just for fun, though, I’ve left them in here because it is quite amusing.

(Note to conspiracy theorists: I left UBS off the list not because I work at UBS LA (I don’t really, I swear) but rather because they did something screwy with their Q1 results and I was too tired/lazy to figure it out at 3 AM. Or maybe I was just hallucinating, who knows.)

We could draw a couple conclusions from this: if you’re at Deutsche Bank or Citi, you’re really screwed, for example. Or that if you’re at Lazard, you’re probably laughing at all your bulge bracket buddies right about now.

But my point is simple: investment banking revenue, on a trailing nine-month basis, is not down all that much - a median of 14% decline. Goldman’s trailing nine-month revenue was up, slightly, as were several others. While Citi and DB in particular were hit hard by all the recent troubles, no one dropped to $0 (unless I were to be cruel and add Bear Stearns to the mix - even then it wouldn’t be quite $0).

However, the picture looks considerably bleaker on a year over year basis for the most recent quarter. Even the mighty Goldman is down over 30%, and the median decline is much higher.

If the trend continues (and all indications are that it has), then 6/30 TTM figures will be down by more than what I’ve suggested above.

Still, based on these numbers I find it difficult to believe that bonuses will drop to $10-20K as some have suggested - revenue was simply not down 80%, nor was it even down to 2001-2003 levels.

Psychology vs. Numbers

I was shocked at these findings. When I started writing this post I had titled it, “Why I Don’t Believe The Numbers” - but then I looked at the revenue for all these banks and realized I might be wrong.

Working in the industry, it’s easy to dismiss the notion of bonuses being nearly the same as last year’s as absurd and not spend a second more thinking about it.

Everyone’s getting laid off; no one who has been laid off can find jobs (especially with thousands from Bear Stearns also looking); and everyone is pitching deal rather than doing deals.

While things have definitely taken a turn for the worst in 2008, remember that bonus numbers are based on the second half of 2007 as well - while depressing, it was not quite the bloodbath 2008 has been thus far.

No, It’s Not 2001 - 2003 (Yet), Sorry

Some people out there on message boards and Dealbreaker comments have used the argument that the economy “feels like” 2001-2003, so bonuses should be about what Analysts made back then ($15-$35K for 1st Years apparently).

While I agree that things are headed downhill and the recession may be both painful and long-lasting, I just don’t think we’re there yet - once again, based on the cold, hard numbers.

Let’s take a look at “recession-era” revenue for some of the banks mentioned above. I’m too lazy to go through filings for all these banks, but here are a few examples:

(Before anyone says anything about attention to detail, these numbers are all in millions; yes I was too lazy to add it and just noticed now.)

Witness how even the mighty Goldman Sachs fell from $1.6 billion quarterly investment banking revenue at the height of the boom to a mere $449 million quarterly revenue in the worst of the recession. Given that Goldman reported $1.2 billion investment banking revenue in February 2008, we still have quite a ways to fall before reaching 2002-2003 era bonuses.

These numbers suggest that we’re somewhere around late 2000 of the last recession - in other words, we’re not close to the bottom yet.

Ok, But Give Me A Number

I hesitate to give a specific number because then it’s easy to see if I was right or wrong. But if I had to guess, I’d say that bonuses will be down 20-30% overall. Something in the range of $60-75K for 1st Year Analysts’ top bonus seems reasonable.

“Top” bonuses might be similar to last year’s numbers and there may be a wider spread between top, middle and bottom buckets - that’s a popular theory, but I find it hard to believe anything will stay exactly the same given revenue declines across the board.

There might be more of a difference between individual banks than in past years, but I think this is less likely than the above scenario - people get annoyed if they are paid 30% less than someone at another bank in the same bonus tier.

But I Could Be Wrong…

As a disclaimer, I could be completely wrong here - in either direction. Many of those who lived through the last recession are no longer even in banking so there aren’t a whole lot of well-qualified opinions on this topic (besides my own, of course :).

If 6/30 quarterly figures are worse than expected, bonuses could drop more than I’ve predicted. And since I don’t have a crystal ball, there’s no way to tell what will happen there.

As soon as Analyst bonus numbers become known, I’ll post here and, in the interest of accountability, state if I was right or wrong. My gut feeling is that the Dealbreaker spreadsheet is a bit too optimistic but more believable than bonuses falling to 2001-2003 levels.

But Who Cares, Anyway?

Although people love to speculate on bonuses, this year I think those of us who are still employed should just be lucky we haven’t been laid off (yet). The bonus is a nice reward for all your hard work throughout the year, but you should never do investment banking solely for the bonus.

Or else you might just wake up with a few extra bodies in your bathtub…

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“If investment banking is not that hard, why do you make so much money doing it?”

Sure, the hours are terrible.  And as an Analyst or Associate, you rank just barely above a primate in terms of respect.

You’re always at the mercy of the client, sacrificing to him your spouse, children (no, not literally… not yet at least) and friends.

And it’s extremely competitive, often requiring a top-notch education, stellar grades and a previous string of finance summer internships.

You need to be able to sit motionless in front of a monitor for 28 hours at a time.

All of these points are valid, and people often claim these explain why you get paid so much.  But they do not directly explain why bankers make as much money as they do (the ones at Bear Stearns excluded).

What Bankers Actually Do

First, we must understand what investment bankers actually do: pretend to be Ari Gold (from Entourage, in case you somehow don’t watch).

When I say “banker,” I don’t mean Analyst or Associate and I certainly don’t mean Models and Bottles AJ; I mean a Group Head, Managing Director, BSD type character.

Analysts would just be Lloyd.

Bankers sell companies just like Ari Gold sells Vince.  And they get paid the same way as well: commission.

So by definition, the larger item they sell, the more they get paid (well, most of the time.  Go with me here).

Investment Banking: High-Price Items, High Commissions

Imagine the average used car salesman.  If his average selling price is $15,000, he’ll have to sell a lot of cars to make a decent amount of money - or move up to higher priced cars.

A real estate agent, by contrast, might sell houses in the $500,000 to millions range.  Sure, the percentage fee is lower than what the used car salesman might get, but since the total dollar value is so much higher, it’s easier to make a lot.

Now picture the investment banker.  He sells companies for millions, hundreds of millions, billions, or even zillions of dollars.  Even with a 0.1% commission, that’s a lot of money.

And for smaller deals (e.g. under $1 billion), the commission is usually more like 1% rather than 0.1%.

High Margins Are Easy With No Expenses

Ok, but what about all those other people in financial services who work with a lot of money but don’t make a lot of money?”

So now we arrive at the second reason why investment bankers make so much money: the margins.

Sure, commercial bankers deal with a lot of money as well.  What passes through their hands every day has a lot of 000’s on the end, but the key difference is that their margins are just not as high because their commissions are lower and their expenses are higher.

You can’t exactly convince someone depositing $1 million in a bank account to give you 1%, at least not without the use of weapons.

Investment Banks: People Are The Only Expense

Banks, by contrast, have very little in the way of real expenses.  There is no Cost Of Goods Sold; there is no factory needed to make products.  All you need for an M&A deal is 4 people and an office.

Investment banks’ only ongoing, non-personnel expense is office maintenance.  Oh, and all that ink to create large stacks of pitchbooks for every meeting.

Travel?  Food and hotel expenses?  For a deal, they are charged back to the client.

And even if they weren’t, next to a multi-million dollar fee, these expenses are insignificant.

Thus, investment bankers make a lot of money because they sell things for huge amounts of money while taking a generous commission and having hardly any expenses.

What about others in finance?

Private Equity / Hedge Fund Compensation

The same principles apply to hedge fund and private equity compensation: in essence, both make a lot of money because a lot of money passes through their fingertips and they take a good chunk of it.

2%, specifically.

But there is a key difference: besides just earning a management fee on their total assets under management, private equity and hedge fund managers also earn a percentage of the returns on their investments, called the carry.

“2 and 20″ is the old phrase describing how these firms are paid: they take 2% of their capital under management and 20% of the return on investment they get.  If they invest $100 million and turn it into $200 million in a year, they would earn $20 million and distribute $80 million to their own investors (limited partners).

For funds that do extraordinarily well, the carry generates a good chunk of the wealth.

But a number of recent studies have shown that most firms actually make more money from management fees than they do from the carry, raising questions over why their investors are forking over hundreds of millions of dollars.

This Seems Too Good To Be True, How Do They Do It?

Mostly by artificially limiting the number of people who can actually break into the industry.  Wall Street is a very small place and it’s no coincidence that such a highly lucrative industry would want to remain small and highly lucrative.

Do you actually need an Ivy League education and 4.0 GPA to do a finance job?  No.

But making it really, really difficult to get an investment banking job is a good way both to limit how many people break in and raise the prestige (and pay) of the industry.

Will It Last?

These are 2 separate questions: will private equity and hedge fund managers continue to get paid so well, and will investment bankers continue to get paid so well.

In the old days, the “2″ part of the “2 and 20″ fee structure was intended to give investors a way to “keep the lights on” before any of their investments paid off.  It was never intended to generate more cash than actual returns on investments.

And indeed, in a recent survey, 57% of pension managers say this structure is “unsustainable.”

But who will be the first to accept significantly lower fees?  Raise your hand.  Yeah, that’s what I thought.

On the investment banking side, some of the fee structures (e.g. 7% for IPOs) are dated as well and some of the “products,” such as sellside M&A, are often commodities.  Clients should not be paying millions of dollars for commodity services.

Fees at these levels should not last but they likely will last because there is very little competition in the form of other banks willing to undercut and charge less.  No one wants to be the first guy in the room to make 1% on an IPO rather than the usual 7%.

If Things Were Perfect…

If the market were perfect, the high fees these firms make would come down as investors stop paying for sub-par funds and clients stop paying for commoditized banking services.

Luckily, if you’re trying to get into finance and concerned about pay cuts in the next few years, the market is not perfect and will not reach perfection in the near-future either.

So you’ll still make a lot of money.  Even if, on an hourly basis, it’s not much better than McDonald’s.

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“I’m done with school a semester early and have nothing to do between now and when I start my full-time job at Goldman Sachs / Morgan Stanley / (Insert Other Prestigious Firm Here). Should I just start in January so I can get a leg-up on other Analysts and get an additional 6 months of work experience?”

No, you shouldn’t.

I always recommend starting at the same time as the other investment banking analysts in your “class,” and not just so you can spend those months sitting on the beach and drinking Piña Coladas.

It can hurt you both financially and in terms of work experience if you go outside the norm and start in January or February before everyone else.

Work Experience Issues

If you start early, you’re not going to be put on any live deals or good projects in your first few months.

When you apply for those investment banking exit opportunities, deal experience is critical. You can’t write a private equity resume, for example, without having substantial deal experience.

Instead of giving you real work, banks will just use you for gruntwork and menial tasks - the work that more experienced Analysts do not have time for.

So you’re not going to great experience if you start early. And by the time you’ve moved up the learning curve and can actually work on real transactions, you’ll be sent off for 1-2 months of training - which means you have to stop working on your deals.

Therefore, banks are no more likely to give you real work at the end than they are at the beginning of your early start.

But How Is It Different When I First Start In August?

In all fairness, you won’t get much “real” work when you first start with the rest of your Analyst class anyway. But there are 2 big differences:

1. When you come in, a whole lot of Analysts have just left and projects are under-staffed. Which means you’ll be getting all the “real work” they are no longer doing.
2. You’ve been through training. Although arguably worthless, it makes you more credible in the eyes of senior bankers and more likely to get good projects.

Market Conditions

Back when Blackstone was buying a new company every day, there were way too many deals and not nearly enough Analysts. But when the market goes downhill and deals dry up, the amount of good experience you get goes sharply downhill as well.

New Analysts, especially ones that start early, are hit hardest by this phenomenon. When the office has more Analysts than it does deals, the newbies don’t get to work on anything substantial.

Salary / Bonus Issues

If you start early, you do have a chance of not getting a pro-rated bonus for your first 6 months.

This means effectively you’re only getting paid less than half of what you should be earning.

This is relatively unimportant in the long term if you stay in finance and keep earning investment banker salaries through the years, but it is yet another good reason not to start early.

I’ve heard mixed reports on this; some people I know of started only 2-3 months early and were actually paid nothing, while others who started half a year early did get some kind of bonus.

Going back to the market conditions argument above, though, in today’s economy you’re less likely to be well-compensated for an early start, simply because there’s less money to go around.

Go Enjoy Life

Bottom line here is to go enjoy college rather than enter the real world 6 months early. Even if you’re done with classes, you can find other interests… take athletic classes, get more involved in activities, travel the world.

It doesn’t hit you while you’re still in school (I didn’t realize it either), but the spring semester of college is the last time you’ll have to do whatever you want with very few consequences.

When you’re working 80-100 hours a week, you’ll wish you could have gone back and not started early. And you’ve already worked hard enough getting your investment banking resume in shape and practicing for your investment banking interviews; it’s fine to relax for a bit.

The Fine Print (Exceptions Apply)

As with most everything else on the site, I like to point out that there are some exceptions to what I’ve written here.

One exception occurs when you’re not in college and are instead breaking into investment banking from other fields, like engineers going into finance, lawyers becoming investment bankers, going into finance from industry, or even getting into investment banking from academia.

In any of those cases, you may just have to start immediately. Aside from these, there aren’t too many reasons why you’d want to start early.

If you’re graduating early and the bank is making you start in January or February, I would make up a story as to why you can’t do this. Some other commitment, family issues, a study abroad program you’ve already committed to, anything really.

Or just don’t tell them you’re graduating early.

No one ever said investment banking was an honest profession.

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-Hicks Musings, The Leveraged Sellout

One common question I’ve been getting lately goes something like this:

“Inquisitor, I just started as a freshman at Harvard.  I am majoring in economics and finance and I’m in the stock market club, the investment banking club, and I even borrowed $500,000 of my Dad’s money to invest in my personal accounts.  So far I’ve earned a 50% return in 6 months.

How can I make sure that I work at Blackstone by the time I’m 25?“

Another variant of this same question:

“I am only doing investment banking so that I can pay off all my student loans in 2 years, but I have no interest in ever doing it again.  What are the exit opportunities like for Associates at boutique banks who want to get into hedge funds?”

For those breaking into investment banking, the exit opportunities are always a big motivation.

It makes sense on paper: you go from working 90-100 hours a week and doing mindless work to working 60 hours a week and doing meaningful work 100% of the time, right?  Right?

The Hours

Lifestyle is a common reason for switching from investment banking into private equity or hedge funds.  Specifically, people assume that they will actually be able to have lives for once rather than sitting in front of a computer for 18 hours a day.

Private Equity Hours

If you go to a large private equity firm, like Blackstone, KKR, TPG or Bain, this assumption is false.  You will be working banking hours for another 2-3 years - bet you can’t wait for that.

I’m amazed at how many people don’t realize this until they get to interviews with these places or until (gasp) they actually start working there.

If you go to a smaller PE or growth equity firm like Summit Partners or TA Associates, then you won’t be working 100 hours a week.  But you will still be doing 60-70 - significantly more than a normal job - and on top of that you will have to travel quite a bit, so forget about a consistent schedule.

And when a deal heats up and you’re close to acquiring a company, your hours may remind you of what it was like to be an investment banking analyst: weekend work and sleeping under your desk for a few nights each week.

Hedge Fund Hours

Hedge funds tend to be better than private equity in terms of consistent schedules.  You work market hours, and weekend work is not required unless you work at a PE-like fund that acquires companies.

However, some travel can still be required for doing “channel checks” (e.g., checking to make sure that the toy retailer you’re acquiring still has Wii stockpiles even in its Minnesota office).

And if you’re at a West Coast hedge fund, you now get to wake up at 5 AM every day so that you’re at work before the market opens on the East Coast.

Bottom Line

Some exit opportunities can indeed offer a better lifestyle, but you’ll never be working 40 hours a week in any of these industries.  And you’ll almost always have a difficult time getting a consistent lifestyle with anything in finance.

Before diving into your next job, figure out what the lifestyle is really like so that you aren’t surprised by the mandatory weekly visits to the Yukon Territory in the middle of winter while doing diligence on an oil company.

The Pay

Yes, private equity and hedge fund pay tends to be higher than those investment banking salaries you always hear about… but that’s not the whole story.

Private Equity Pay

At private equity firms, you will make about as much per year as post-MBA Associates at banks make (e.g. significantly more than you made as an Analyst).  At smaller places and growth equity firms, the difference in pay is not as huge, but it does tend to be higher than banking at the equivalent levels.  At bigger places, it can be much higher than entry-level banking Associates; some even guarantee $500,000 or so per year.

However, the pay difference is much greater at the Managing Director/Partner level than it is at the more junior levels of private equity and investment banks.

So it would not be rational to want to switch into private equity solely because of higher pay, unless you are a very senior hire.

Hedge Fund Pay

Hedge fund pay can vary wildly between different funds.  The standard seems to be a base salary of $100,000 for those coming in directly from banking, plus a bonus that will take you to the $200,000 - $300,000 total compensation level (very similar to private equity Associates).

This is much higher than what you could get as a 3rd year investment banking analyst, and is about on par with what post-MBA Associates at investment banks make.

Depending on the fund, their performance, and your performance, the bonus could be significantly more or less than this; if you have really bad luck, you might just get nothing as the fund collapses before your eyes! (ok, this is unlikely)  And if you do really well, you might make closer to $500,000 total.  That scenario is unlikely except for the largest funds.

However, as with private equity pay, there is a significantly greater difference at the Partner level, where top hedge fund managers can pull in over $1 billion in cash per year.  That is more than private equity Partners make and far, far more than even the CEO of Goldman Sachs made last year.

It should also be noted that hedge fund managers making $1 billion are exceptions rather than the norm and most managers don’t make anything close to that, though in general they still make more than investment banking Managing Directors.

Exceptions Apply

One exception to all these salary figures is prop trading and certain small hedge funds / prop trading firms that could potentially pay you an unlimited bonus.  I know of at least one place that actually pays you 50% of what you earn from trading, and there are several recent college graduates earning millions of dollars per year there.

But most people going into buyside jobs are not going to suddenly be earning millions of dollars at age 24.  Your salary will almost certainly increase, but the really substantial increases over investment banking salaries come at the more senior levels.

The Work Itself

This is where people have some of the most incorrect ideas about private equity and hedge fund jobs.

Yes, there is a lot of stupid grunt work in investment banking that everyone hates doing… changing periods and commas in presentations, editing text in documents 500 times… formatting PowerPoint graphs.

The amount of stupid work you do certainly decreases when you move onto private equity or hedge fund jobs.

But guess what?

If you don’t like Excel or you think analyzing companies, doing valuations, or modeling are boring, you’re not going to like the buyside very much.

The work is just not that different.

You still do financial modeling… you still do diligence, and you still have to do some annoying grunt work.  When private equity firms acquire companies and work with banks, for example, the Associate will be tasked with writing “bid letters” and working with banks on financing, which can often require a lot of number scrubbing and attention to detail.

Sourcing

Not only is the work fairly similar to what you do in investment banking, there is also a new type of work that most people despise: sourcing.

“Sourcing” is a euphemism for cold-calling.  This is more prevalent at growth equity places (Summit is notorious for making its Associates cold-call companies all day) than at large private equity firms.

It may sound impressive at first to say that you’re in charge of bringing in deals.  You may even think to make it part of your private equity resume.

But actually, you’re just in charge of cold-calling; the Partner still owns the deal, even if you “sourced it.”  Some private equity firms do pay their Associates a bonus for closing deals they generated, but it’s paltry compared to what the Partners will make off it.

Managing Directors in finance source deals via their long-standing relationships and through regular communication with prospects.  They don’t cold-call every company on the Inc. 5000 list until someone says, “yes.”

You, by contrast, will be doing this, or at least some form of it.  And it’s one of the most common reasons why people don’t go into private equity or at least avoid the firms with a “sourcing model.”

The Social Aspect

This is one of the most overlooked aspects of investment banking vs. buyside jobs.  With banking, you have a group of other Analysts working alongside you and you chat with them in your downtime, go to Starbucks together and enjoy models and bottles with them outside work.  It’s almost like living in a dorm in college all over again.

With buyside jobs, this disappears.

You might be the only Associate; you might even be the only person under 30 in your office, depending on the firm.

Private equity firms and hedge funds tend to be much smaller than banks and don’t have as much of a need for an army of Analysts and Associates to do work… there simply isn’t as much work to be done.

This may sound less significant than the other factors I list above, but don’t underestimate it.

I actually know of some 2nd and 3rd year Analysts who were reluctant to leave for this very reason - yes, the pay and upside might be better, but not having any close friends in the workplace can make for a bad experience.

The Bottom Line

I don’t agree with those who think investment banking is only a stepping stone to working in private equity or at a hedge fund.

Doing the job only because you think those options are going to be completely different experiences is a bit absurd.  They’ll be better in some ways, but they can also be worse in some respects as well.  No one in banking ever yelled at you for not cold-calling enough companies.

If you want to work in private equity or at a hedge fund, it’s better to go there directly; if that is not possible, just do banking for a year and switch over (harder to do now with the market downturn).

But What About Venture Capital And Other Jobs?

I know someone is going to bring this up unless I discuss it here.

Venture capital and corporate development jobs can indeed offer a significantly better lifestyle than either private equity or hedge funds.

However, you will likely take a pay cut compared to what you were making as an investment banking analyst.  You could actually be as senior as a VP in banking and make less than a 3rd year Analyst!

Plus, you still have the issue of the work not being that much different and the social aspects referenced above.

Don’t get me wrong: if you want to still have a good salary and a much better lifestyle, venture capital or corporate development could be right for you.

But do recognize that, as with any other choice you make, there are tradeoffs between all these options and nothing is “the best.”

Feedback

What has your experience been with buyside jobs?  Am I off on anything here?  I’m curious to know what others think about these issues.

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The investment banking internship recruiting season continued in full force in February 2008, and many readers asked questions on how to decide on summer internship offers and also how to get them in the first place.

I covered a good amount of investment banking lifestyle material as well, as including the perennial question of just how high investment banking salaries are.

Getting An Investment Banking Job / Getting A Private Equity Job

For those seeking investment banking jobs or summer internships, I wrote the most detailed, freely available guide to superday interviews out there. Why bother with an over-priced Vault guide when you have this? (Well, assuming Vault guide isn’t free for you anyway).

And for those struggling to get investment banking interviews in the first place, either because they are from non-target schools or are trying to break in from other industries, I wrote a guide on using networking to get into investment banking.

Beyond just investment banking summer recruiting, private equity recruiting for the summer of 2009 is also starting up. For those looking to break into the industry, I wrote a guide on how to write the ideal private equity resume and how to write about your investment banking and deal experience.

Finally, beyond just the usual resume advice, I also launched a resume review service at the start of this month for those who are looking to improve their resumes. Those who have used the service so far have been very pleased with the results and I’ll add some testimonials to the page eventually.

Deciding On Investment Banking Summer Internships

I also received many questions on how to decide on summer internship offers this month, so decided to run 2 reader Q&A columns.

One was focused on how to choose an investment banking summer internship, while the other focused on breaking into investment banking with a Ph.D. background, whether to choose a boutique or bulge bracket summer internship, and how to handle informational interviews.

I hope these have answered many of your questions in these Q&A features, but as always, contact me if anything else comes up.

Investment Banking Lifestyle And Investment Banking Salaries

I did not focus on lifestyle questions as much this month, but did manage to cover the worst time to be an investment banker: Friday at 4 PM. That’s when everything bad happens and when the investment banking analyst gets his weekend work. And if you’ve ever wondered why attention to detail is so important as one of the qualities a banker needs, I covered that as well.

I also settled a longstanding question over whether or not investment bankers or McDonald’s employees earned a higher salary. It turns out, contrary to popular belief and a widely circulated email several years ago, investment banking salaries are indeed higher than what you could earn at McDonald’s, even on an hourly basis.

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-Gordon Gekko, “Wall Street” (1987)

A few years ago there was an email floating around that claimed to show you could earn more per hour working at McDonald’s than at an investment bank.

Sure, making six figures as a 23-year old is nice, but if you have to work 120 hours per week, you can’t possibly be making that much per hour, right?

Intuitively I thought “no, but you must be making more than a McDonald’s worker.”

But sometimes intuition is not enough.

Best Case Scenario

For entry-level investment bankers, the best case scenario happened this past year in 2007. Base salaries were $60,000 and bonuses were $90,000, for a grand total of $150,000 in compensation. Not bad for recent college graduates.

On average, investment bankers will work around 90-100 hours per week in their first year. This might be a bit high or a bit low (!) depending on the bank and group, but we’ll go with it for now.

With 52 weeks of work per year (there’s no vacation, thank you very much) and 90 hours per week, you would have earned $32.05 per hour ($150,000/(52*90)) in 2006-2007. At 100 hours, that drops to $28.85.

Even in the worst case scenario last year, where you worked 140 hours a week, every week, you would still be at $20.60 per hour. And no bankers work that much on a consistent basis (ok, UBS LA might).

But 2007 was a great year in the world of finance, with bonuses at record highs. What if we journey back into the Dark Ages of 2001-2002 and look at investment bankers’ salaries?

The Dark Ages: 2001-2002

Back in these years, Analysts were lucky to get $10,000 for their bonuses. Sometimes they just received lumps of coal. And they still worked a lot, but made a ton of pitch books rather than working on actual deals.

A $10,000 bonus and $60,000 salary would imply $14.96 per hour at 90 hours a week. So you’d be in administrative assistant range, but still not quite at McDonald’s level.

But what if you did nothing but make pitch books for 140 hours a week, every week? And never got deals to work on because the dot-com bubble just burst?

You would make $9.62 per hour.

Ok, But What About If I Worked At McDonald’s?

According to this Wiki Answers page on McDonald’s (very reliable source, I know), the wage is $9.30/hour for those under 17 and $9.57/hour after “4 months of training.” We’ll ignore that this appears to be the wage in Australia and is therefore likely in Australian, not US dollars.

So it looks like you could never really do worse per hour than you would by working at McDonald’s.

Or Could You?

If you earned $0 for your bonus and only made $60,000 while working 140 hours a week, that would be $8.24 per hour. AKA, below McDonald’s wages. No models and bottles for you.

So theoretically it is possible to earn less than a McDonald’s worker as an investment banking analyst, though not terribly likely.

Unless you happen to start in the middle of another huge recession and get stuck making pitch books 140 hours per week.

Yes, I know Steve Schwarzman makes way more than $41.21 an hour.

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-My Wardrobe, Leveraged Sellout (11/12/2004)

I get a lot of questions on good reasons to say you want to be an investment banker. The good news for everyone out there is that the list of reasons to do investment banking is fairly standardized. There’s not a whole lot you can say that I haven’t already heard before, and to be honest, standard answers like “I want to learn a lot” are still good ones.

But as an investment banking analyst, there is typically more downside than upside in most of what you do.

The same goes for interviewing and especially superday interviews. It’s easier to give a bad answer than to surprise someone with a brilliant answer, because there are no brilliant answers: just good answers, mediocre answers and terrible answers. Today I’m going to focus on the downside: mediocre and terrible answers. Reasons NOT to do investment banking.

Models And Bottles

This is one of the funniest videos I’ve ever seen on “banking lifestyle” (ok, I guess there haven’t been all that many videos on this topic), but it doesn’t mean you should say “models and bottles” when asked why you want to do banking. I don’t think anyone’s actually foolish enough to answer with this exactly, but any variant of making money/living the high life/getting beautiful women is a bad answer.

A lot of (most?) bankers are actually in the job for this very reason, but it’s not acceptable to admit it or suggest that’s why you’re interested in the field. Yes, investment banking salaries are legendary, but it’s taboo to discuss that.

Sometimes they try to put you on the spot in stress test superday interviews and get you to admit this under duress. In one interview they asked me, “Are you motivated by money?”

How do you answer such a question without admitting that you are motivated by money but also letting them you know you are in fact motivated by money?

“I’m not motivated if you just hand me a pile of money. I am motivated to work hard and earn money through my efforts.”

Plus, if you actually admit to doing it for the models and bottles, you’ll probably be fired (like A.J. here in the video once HR found out).

You Want An Entrepreneurial Work Environment

This one is a bit more controversial. I’ve heard interviewees say their long-term goals are to start their own companies or do something independent, and they’re just using banking as a stepping stone. Even if this is your actual goal, I would strongly recommend against saying so in an interview.

Working at a bank, especially as an investment banking analyst, and doing something entrepreneurial are completely different. As Samuel L. Jackson might say, “ain’t the same ballpark, it ain’t the same league, it ain’t even the same sport.” At the very top levels of banking, what the Managing Directors do is somewhat entrepreneurial because they have to build the business and bring in new clients. It’s not the same as building a business from nothing, but it’s closer than an Analyst will ever be.

The other issue here is that investment banks want to see that you are committed to the job for at least 2-3 years. Even if you don’t want to stay in banking, they would be much more comfortable knowing you want to go to private equity or join a hedge fund, because at least those are still in the realm of finance.

To Say You Could Hack It

This one, again, falls under the realm of something you wouldn’t say, but might have in the back of your mind if you want to do something completely different eventually, such as public service.

Although you can learn a lot in 2 years of banking, it is not worth the pain and suffering you go through if you just want to show people “you could hack it.” If you really do want to do it and then go off and do something unrelated, it would be most rational to be an Analyst for 1 year and then leave for other pursuits. I know of several people who have done something similar. While it’s still painful, 1 year is better than 2 (as long as you’re not at UBS LA). And you still get to take advantage of those investment banking bonuses.

Most of your learning occurs in the first 6 months - 1 year period, so you won’t be missing out on much if you leave after that; the main drawback will be fewer closed deals to discuss.

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How To Get Into Investment Banking With A Low GPA

“Thanks for providing such a quality resource for free! I would love to get some more advice regarding investment banking. In the next month, as a junior, I will be applying for the summer analyst positions at all the bulge bracket banks. However, my GPA is a 2.8. What are some ways that I can get my foot in the door to land an interview?”

Inquisitor:

This is a tough one, and I don’t have an easy answer for you. Many banks have a strict cutoff they use to weed out people with low GPAs, and it’s difficult to get past this if you’re put in the same applicant pool as everyone else. Here are some tips on getting around this:

• If you have any special circumstances, e.g. being a Varsity Athlete or having a highly unusual background, you need to make these extremely prominent on your resume. Although banks may still use a GPA cutoff, you at least stand a better chance if your special circumstances are immediately clear and humans are reading your resume.
• Network extensively and use your school’s alumni network - contact alumni, ask them about themselves, briefly introduce yourself and they can help you get past the gatekeepers. GPA only matters for getting your foot in the door; if you are persistent enough you can leverage the alumni network to do the same, and often a recommendation from someone very high up is more useful than a high GPA.
• Keep your options open and consider middle-market and boutique investment banks as well. You can easily leverage this experience into full-time interviews at bulge brackets (seen many people do this and get offers), and they may be easier to get into with a lower GPA.

I wish I had a magic answer that solved your problem here, but this is about the best you can do given how banks run their recruiting processes. The good news is that once you get to superday interviews, it’s all about performance rather than GPA or school background.

Finance Internships For Freshmen

“I have found your blog very helpful and was wondering if you could guide me in the right direction regarding summer opportunities. I’m a freshman and realize that there are very limited finance-related opportunities for me. However, I have found two opportunities at bulge brackets that encourage freshmen to apply - how competitive are these programs? Do you know of any other such opportunities on Wall Street?”

Inquisitor:

It’s very impressive that you’re looking for internship opportunities in finance as a freshman - I don’t think I even knew what banking was until my junior year.

You can apply to the programs you have found, but I think the chances of getting them and getting meaningful work to do as a freshman are fairly low. Most banks only seriously look at juniors and occasionally sophomores for certain programs.

I don’t know of any good opportunities for freshmen offhand. Cold-calling may work, but I would suggest networking with alumni is the better tactic here. To actually get meaningful work experience, you should probably focus on smaller firms and ones where you know people already - as a freshman, the work experience you get is much more valuable than the brand name. Take actual financial analysis at a start-up hedge fund over serving coffee at Goldman Sachs any day of the week.

When contacting alumni, you should introduce yourself as being very eager to learn finance and have a short 3-5 minute pitch in either email or verbal form that gets this point across. Make sure you show an interest in them; most of the conversation should focus on their background/history and at the end you can briefly ask if they know of any opportunities or could pass your name/resume along to friends who might.

And make sure your investment banking resume is perfect before sending out your materials to these alumni.

Saving As An Analyst

“How much can you really save as an Analyst? This past year bonuses were $90K and with a base salary of $60K, I imagine you’d be able to save quite a lot, right?”

Inquisitor:

As an Analyst, your main expense will be apartment rent so it depends greatly on whether you live in New York City or some other high-cost area or somewhere cheaper. If you’re in New York, it’s going to be difficult to pay less than $1500 for rent each month even with a roommate. That immediately uses up $18K per year right there, and with only $35-40K of after tax income, represents nearly half of what you’ll make prior to bonus.

Other places like San Francisco are also more expensive than the middle of nowhere obviously, but at the same time it’s easier to find good deals on apartments. If you can reduce your rent to $1000 or less a month then the numbers are easier… $35K after taxes, $12K spent on rent, maybe $5K or so in other expenses (your bank will cover all food, cell phone bills, etc.).

All in all, you can probably save $15-20K in your first year as an analyst prior to bonuses if you live a frugal lifestyle. If you get bottle service every single weekend obviously this will go down by quite a bit, but it’s do-able if you don’t live in New York.

Although investment banking salaries are high, this amount reflects that base salaries, specifically the investment banking analyst salary, are only average until bonuses are received.

The $15-20K is a nice sum for a 23-year old to have saved up, but I wouldn’t worry too much about being super-frugal, especially if you plan to work in finance for a few years. Saving your bonus and not spending the money on a new car will make far more of a difference than cutting smaller costs here and there.

Questions On Banking? Finance? Resumes? Life?

Email The Inquisitor and be featured in upcoming Q&A posts.

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