It’s fun to play in first-person shooters, but it’s even more fun in real life.
And it’s most interesting when you put 2 high-level executives in the ring and ask them to toss aside the spreadsheets, the assistants, and the support teams, and simply throw down.
Today, we’re going to look at a match-up between 2 positions that you’re interested in reaching one day: the Chief Financial Officer (CFO) in the corporate finance team of a company, and the Managing Director (MD) at an investment bank.
Chances are that you don’t even know what a CFO does – so we’ll start from there and then go through everything else, from how you add value, to how you get promoted, to how much you get paid, to the best and worst parts of each job.
At the end, only one will be left standing.
Well, assuming it’s a knockout rather than a boring victory by points…
Who is a CFO, and What Does He / She Actually Do?
No one really knows.
You’ll see them on TV or pitching the company during investor calls, but it’s hard to say what exactly CFOs do all day.
The job of a Managing Director, on the other hand, seems a lot sexier and easier to explain: they run around wining and dining clients, pushing deals across the finish line, and “dialing for dollars” (or rather, their bonuses).
So let’s start with the more mysterious role: Chief Financial Officer means someone who owns a P&L and is the right arm of the Chief Executive Officer.
A CFO manages the Corporate Finance department for a company, division, or a plant or a country with a minimum size of 500 employees.
Here, we’ll focus on small to medium CFOs that manage up to 10,000 employees. These CFOs are the most common, and the rank is equivalent to a Managing Director in the M&A team of a bank.
To qualify as a “CFO,” your bonus must be tied to the performance of the business – if this is not true, then you are just a glorified “chief accountant.”
Moving Down a Level: What You Do Every Day on the Job
As a CFO you have 4 main responsibilities:
- Meet the Net Income Target – You define the targets for the whole company, and then your job is to make the numbers. That means coordinating with all the department heads and making sure that you execute the plan properly.
- Assist the CEO with Financial and Strategic Decisions – You are the right arm of the CEO, and you help him understand the financial implications of different decisions. If this is a pure accounting decision, you won’t need the CEO’s approval – but when it comes to big moves like changing the target market or making an acquisition, you’ll have to run different scenarios and projections to help the CEO and Board reach a decision.
- Keep the Regulators and Auditors Happy – You have a lot of people breathing down your neck, and you need to make sure they all certify your financial statements – unless you want to end up like Enron or WorldCom.
- Grow the Talent Pipeline – Don’t forget you are also responsible for HR in corporate finance. Part of your job is to spot the talent in the organization and make sure the right people get the right jobs so that they’re challenging themselves, growing, and sticking around for the long-term.
As a Managing Director, by contrast, you split your time between 3 main tasks:
- Wining and dining clients, PE firms, and VC firms to generate business – This can be done at conferences, in 1-on-1 or small group meetings, and remotely via emails, calls and video calls.
- Keeping your potential clients informed of what’s going on in the markets and why it’s a great time for them to buy, sell, or raise capital (because it’s always a great time to do any of those).
- Overseeing deal executions to make sure that everything runs smoothly, that deals get done, and that your bank gets paid.
Who Wins: If you want variety, the CFO role is better; if you prefer focusing on more narrowly-defined tasks, the MD wins.
How Do You Become an MD or a CFO?
For both MDs and CFOs, the answer is internal promotion. You rarely see someone from outside the industry breaking in at this level.
But there is an important difference: as a CFO, on top of working in finance your entire life, you’ve probably also spent a good amount of time with the company itself. Many Fortune 500 CFOs are “lifers.”
Sometimes Boards can bring in CEOs from the outside to give a new impulse to a division or to the company as a whole; CEOs mostly deal with strategy anyway.
But as a CFO, you have to know the processes, operations, and different divisions inside and out. Since you’ll also maintain key relationships with the regulators, it’s not a position you can change every 2 years.
So to become the CFO of a small division, you need to spend some time as a Controller, FP&A manager, or Treasurer for a division or a region first.
And then to become CFO of a big firm, you need to have 10 years+ of experience as a CFO of a large region, and also some exposure at the headquarters-level.
In some rare cases, a firm brings in an outside CFO because it has been growing very fast and doesn’t have the internal expertise to take it to the next level (see: Gideon Yu and his roles at YouTube and Facebook).
Or the external guy might have very specialized skills that are needed (e.g., dealing with a complex acquisition or divestiture).
Most of the time, though, being ready to hit the ground running is too important to sacrifice, and companies tend to hire internal candidates as a result.
The other issue is that the previous CFO committed to Net Income targets, and you’ll still have to hit those targets even if you get hired as an outsider. In other words, there’s no time for a smooth transition period.
If you’re an MD, by contrast, you’re more like a “free agent” in sports: you can move around to different banks more easily because you bring your full Rolodex with you each time.
The internal processes are quite similar from bank to bank, so you won’t have to spend 3 years getting up to speed.
Getting promoted to MD most likely means you had a previous position as a VP, senior VP or MD at another bank – and very often, you’re switching banks precisely because the new bank is promoting you in the process.
Who Wins: Becoming CFO is more of a marathon, while becoming MD is more of a sprint that may require hopping to many different firms first. So it depends on your personality and how you prefer to “exercise.”
“You Try to Add Value… I Straight Create It”: Value Creation 101
This same challenge exists in corporate finance when you become an FP&A manager or a Controller with a team of 20+ people – because you need to execute less and manage more.
To “add value” in either role, you need to overcome these key challenges.
As a CFO, you have a team of 50 to 100 people and you no longer do anything by yourself anymore. You just sit through meetings the whole day and make decisions.
Meetings are key because you can’t manage a whole finance department and your relationship with the CEO via 1-on-1 conversations: you can only do so via team meetings.
As a CFO, you add the most value by balancing quarterly Net Income targets with investing enough to grow earnings 5 years down the line.
So while you may not be producing work product directly, each decision you make has to contribute to that balance – and if you get it wrong, you won’t be at the company very long.
As an MD, you add value by generating deals, managing your existing relationships, and developing new relationships. That is your only job, so you must do it well.
While it’s tough to make the mid-level-to-top-level transition in both industries, there are fewer “casualties” in corporate finance at the pre-CFO level than there are at the VP-level in banking.
That’s because your results are less measurable as an FP&A Manager, whereas the numbers don’t lie when it comes to VPs and how much in fees they generate.
So some people will get away with being bad managers for 2-3 years before reality catches up and they’re forced to exit. Underperforming VPs, by contrast, are “removed” far more quickly.
Who Wins: You add the most long-term value as a skilled CFO who stays there for years, but you create more measurable value as an MD.
Chief Compensation Officer: Pay & Bonuses
For both CFOs and MDs, the biggest component of compensation is variable and completely dependent on business performance:
- CFO: You make the financial plan in collaboration with the CEO, and then your bonus is based on meeting those sacred Net Income targets you announced. Sure, keeping the regulators happy and growing your team are important, but at the end of the day if you meet the target, you’ll get the maximum bonus.
- MD: Your bonus is based on the amount of business you can generate, plain and simple. This is a sales job where you are pushing “technical” products. You focus on the volume of fees (top-line revenue), whereas the CFO also has to consider the quality and profitability of business his division generates.
Now let’s talk numbers: the base salary will range from $200K USD for the CFO of a small division to $600K USD for the CFO of an entire region. And then the variable part will range from 50% of this number to 200% or more if you are doing a great job.
So, bottom-line: your all-in compensation will range from $300K to $2MM+ USD depending on your performance.
Managing Directors’ compensation is even more variable because base salaries are often lower: on the low-end, they might be between $200K and $300K USD, though you’ll sometimes see salaries higher than that at the big banks.
But the annual bonus can take MDs up to the $2MM – $3MM+ USD range, depending on deal flow.
Of course, if the MD delivers 0 closed deals he’ll also get a bonus that’s closer to $0.00.
Who Wins: The CFO wins if you look at average compensation and factor in his much less risky “worst case scenario,” but the MD wins if you factor in the # of years required to reach the position, which can be significantly shorter.
Your Greatest Weakness: What Sucks About the Job
This is one area where MDs may seem like the winner: they’re not under tremendous pressure from their bosses as long as they close deals.
By contrast, even a successful CFO is constantly under pressure from the CEO, the Board, the regulators, and even other corporate finance team members asking for favors.
And if the financial statements are wrong or you screw up your stock option plan, you’re looking at potential jail time. Even something put in place by your predecessor could get you in trouble!
It’s also tough to get credit as a CFO because the CEO will always get the praise for being a “visionary” if things go well – but if the company fails to deliver, you’ll be blamed for “poor execution.”
Laying people off is also tougher as a CFO because you’ll have to axe quite a few 55-year-old accountants who might find it really, really tough to get another job.
As an MD, by contrast, you’ll still fire people but more of them will be in the 25-35 year old range and will be in a better position to find new jobs.
In terms of crazy requests, CFOs have a slight advantage because most requests will come from the CEO rather than dozens of outside clients who call you at 3 AM asking for favors.
People like to say that extreme attention to detail is required in investment banking, but the requirements are actually higher in corporate finance.
If you make a mistake in a pitch book, maybe it will cost you the client or deal… in the highly unlikely case that someone actually notices.
But in corporate finance, if you “make a mistake” you have to restate the financial statements, which will send the stock price plummeting and might result in your head on a guillotine.
Management is also much tougher for a CFO, since you’re managing teams of at least 50 people and they’re not all machines willing to work crazy hours and give up their friends/family/hobbies to do the job (unlike IB analysts and associates).
You have to adopt a more “human” approach and you can’t just issue orders to your subordinates (while swearing at them and making snarky comments).
And you can’t just throw money at people to get them to stay, since your bonus pool is much smaller than the pool at banks.
As an MD, on the other hand, the worst part of your job is the constant pressure to get deals done. But that pressure is more concentrated in one area, so you have fewer tasks to worry about.
Who Wins: The MD takes this one – maybe not quite a knock-out, but definitely a victory on points.
Your Greatest Strength and the Best Parts of the Job: Got Prestige?
One of the best parts of being CFO is that bankers work for you.
You can go to all the MDs you know and ask for a “broad buy-side pitch” on potential acquisitions, and then make them jump through hoops to present on deals you’ll never do (not that I’m recommending this, of course).
You also get to shape the direction of a big organization for years or decades into the future, whereas everything is much shorter-term in banking.
Some people argue that investment banking is “prestigious” whereas corporate finance is a “back office job”: the second part is technically true but it’s not really accurate since, as CFO, your bonus is directly tied to business performance.
No, you’re not winning new customers for the firm… but you are managing investor relations, launching projects and doing deals, growing the talent pipeline, and traveling all over to meet customers and shape big-picture strategy with the CEO.
So it’s a lot different than a job where you’re reconciling trades or doing bookkeeping.
The best part of the MD’s job is that it’s all relationship-driven – so if you like that aspect but you hate Excel and technical details, the MD role might be a much better fit for you.
Who Wins: This one’s a draw because both roles have their advantages.
Location and Lifestyle: Both of These Beat Consulting, Right?
The good news is yes, both roles beat consulting when it comes to (the lack of) constant travel.
When you’re 25, it’s OK to work crazy hours and travel consultant-style, but when you reach age 40 it really becomes a burden.
Unfortunately, neither CFOs nor MDs enjoy a great lifestyle… for different reasons:
- MD: Working with clients means that you travel a lot (at least a few times per month) to pitch your ideas and execute deals. That also means you need to be available 24/7 if a client has a question or wants to talk to you about the market. You have your minions for the execution, but it’s still not even close to a 9 to 5 job.
- CFO: You’ll visit different plants and offices, but you’ll also fly to the headquarters every month for meetings. This is a “light” travel schedule compared to MDs, but there’s a catch: There’s a very low chance that your next job will be in the same city, or even in the same country.
So as CFO, you’ll have to relocate every 2 to 4 years and move your family with you.
The relocation packages are very generous, especially if you get an expat contract on top of it… but it’s still a sacrifice to move to Kazakhstan for 3 years (though admittedly better than mining for gold in Saskatchewan).
As a regional CFO, you’ll also need to visit other CFOs that report to you and the hours can get crazy because you have to work across multiple time zones.
Who Wins: MDs win this one – they both travel a lot, but at least you won’t have to relocate every few years as an MD or work across quite as many time zones.
The Final Round: Exit Opps and Career Management
MDs and CFOs are senior people in the organization, so it’s rare for them to leave for a different industry in the same way that IB Analysts leave for private equity.
They move to the next level within the same company or the next level externally, but 95% of the time their career moves are to the same type of job.
- CFO: Let’s say you become CFO at age 40; you have 50 people reporting to you and a small portfolio. If you do well, you’ll get promoted to a bigger P&L with more challenges and maybe a different kind of portfolio. Your job will get harder and harder every 3 or 4 years, with each promotion, until you reach your “limit.” When you hit this “limit” you’ll spend more time in each job and your assignments will vary until you retire or get fired.
Some people never reach their limit and instead become CFO of an entire Fortune 100 company; sometimes they even get promoted to other C-level roles.
Keith Sherin, the former CFO of General Electric, was promoted to CEO of GE Capital, but that’s definitely not the most common exit opportunity!
- MD: Your main exit opportunity is the same job at a different bank, or getting more responsibilities at your current bank. For example, you might be promoted to Senior MD, Group Head, or you might even become the CFO or CEO of your bank – but there’s no straightforward “path” to get there and luck will be a major factor.
Who Wins: This one’s a draw since they’re so similar.
The Knockout Punch: Who Wins When a CFO and MD Fight It Out?
If you’ve been adding up the points all along, you’ll see that the MD has come out 2 points ahead – but that’s not the whole story.
Most of the categories were tied, so I’d argue that this one comes down to your personality more than anything.
If you’d rather specialize and use one specific skill (sales) to win new clients and do deals, the Managing Director job option is better. Pay is more variable, the work is more stressful at times, and you’re under constant pressure to do deals.
On the other hand, if you’re a jack of all trades, you like managing big teams and making long-term investment decisions, and you want to stay in one role for a long time, then Chief Financial Officer jobs are better.
Whatever you choose, keep in mind that very few people ever make it to the MD or CFO rank because the “pyramid” is very steep.
Just imagine how many Egyptians likely died building the pyramids, and you’ll get an idea of the “casualty rate” as you ascend to the top in either of these roles.
So it’s a bit of a false choice: the question you should be asking yourself is which industry you’re excited about to begin with – you may not reach that ultimate destination, so you better enjoy the ride.
Let us know what you think about this CFO vs. MD debate in the comments!
Bonus points if you’ve ever witnessed a CFO and MD get in a physical fight after a train wreck of a meeting…