Investment Banking Compensation: Salaries, Bonuses, Stubs, and More
You might have noticed that I haven’t published bonus predictions or reports in a few years.
From 2008 through 2016, I wrote a pair of articles on the topic each year.
And then I stopped.
Luckily, banks ignored me and kept paying out healthy bonuses to everyone.
I’ll explain why I stopped publishing these reports, but I don’t want to bury the lede – this article is about IB compensation, including the actual numbers as of 2018, so let’s get started:
The First Rule of Compensation: Discount What You Read Online
If you do some Google searches, you’ll find articles that make statements like the following:
“An investment banking analyst should make $155, $180K, and $205K in years one, two and three (plus or minus $5-10K depending on how good or bad the bank did).”
These reports aren’t necessarily “wrong,” but they are incomplete because:
- They don’t give a compensation range – and different banks and groups pay different amounts.
- Bankers are ranked and put into different “buckets,” so your end-of-year bonus will vary based on that.
- They don’t explain whether these amounts include just your base salary + end-of-year bonus… or also the signing bonus… or also the stub bonus.
How Compensation Works: Base Salaries, End-of-Year Bonuses, Signing Bonuses, Stub Bonuses, and More
For junior bankers (Analysts and Associates), there are five components to compensation:
- Base Salary – Your most reliable income stream. You earn this regardless of whether you’re a superstar or a complete failure – at least until you get fired. Base salaries are $85K, $90K, and $95K USD for 1st, 2nd, and 3rd Year Analysts at mid-sized and large banks. Some elite boutiques may pay slightly more, while regional boutiques may pay slightly less. Base salaries for Associates go from ~$140K to ~$180K as they move up.
- End-of-Year Bonus – This is some percentage of your base salary, and it’s based on your ranking “bucket,” overall deal flow, and how much other banks are planning to pay. Some banks pay this bonus to Analysts at the calendar-year end and offer a “stub bonus” after the first 5-6 months, while others pay this bonus in the summer after an entire year of work has ended. Full-year bonuses for Analysts tend to be between 70% and 100% of base salaries, with numbers at or above 100% for the top performers. Expect higher numbers at elite boutiques and lower numbers at regional boutiques. Top Associate bonuses are 100%+ of base salaries.
- Stub Bonus – New Analysts and Associates start working in the summer. They used to receive their bonuses one year after that, but many banks started to pay bonuses to everyone at the same time, which created a problem: How much of a bonus do they award to bankers who just started working 5-6 months ago? The answer is “not much” because Analyst stub bonuses range between $20K and $30K. Associates earn more than that, but it’s still a low percentage of the Year 1 base salary.
- Signing Bonus – Compensation reports often ignore this one, but most banks pay new full-time hires a one-time signing bonus as well. The range for Analysts is $5K – $15K, with smaller firms at the low end of the range and elite boutiques at the high end. Associates should receive significantly more (a multiple of these numbers).
- Benefits – Finally, you receive health insurance, vacation days, and potential participation in the firm’s profit-sharing or 401(k) retirement plans. Many people ignore these points, but receiving solid health insurance from a large company is extremely valuable in the U.S., though it matters less in countries with healthcare systems that actually work (Canada, Europe, etc.).
Beyond the Analyst and Associate levels, the stub bonus goes away because everyone works on a calendar-year basis from the start.
Base salaries and bonuses increase substantially, but large portions of your bonus will be in stock and deferred compensation – at least if you work at a bulge-bracket bank.
The deferred portions often vest over 3-5 years, so don’t count on being able to access that full $1 million bonus anytime soon.
Finally, bonuses for senior bankers are much more closely linked to individual performance, though the “formula” is not always straightforward.
For example, if you generate $10 million in fees for the bank, what percentage of it goes to your bonus? It depends on the bank and deal type.
The Cold, Hard Numbers for Analysts through Associates, VPs, and MDs
Base salaries for 1st, 2nd, and 3rd Year Analysts at large banks are $85K, $90K, and $95K, with year-end bonuses between 70% and 100% of those numbers (lower percentages in earlier years and higher toward the end).
Average total compensation ranges might be $140K – $160K, $160K – $180K, and $180K – $200K for 1st, 2nd, and 3rd Year Analysts.
These numbers are pre-tax and exclude the stub bonus and signing bonus; add ~$10K if you want to count the signing bonus.
The stub bonus is a negative development because it means you’ll have to wait 1.5 years for the full Year 1 bonus, and you may never see your full Year 2 bonus.
Associates earn base salaries of $140K – $180K, progressing up from Year 1 through Year 4, with bonuses of up to 100%+ of those base salaries.
Total compensation might be in the $250K – $400K range, with a lower number in the first full year ($200K or less) due to the stub bonus.
Vice Presidents through Directors earn base salaries ranging from $200K to $300K, with bonuses worth 120% – 150% of base salaries.
Total compensation ranges from ~$450K up to ~$700K.
Managing Directors earn base salaries of $400K – $600K, with highly variable bonuses that might be almost nothing or millions of dollars.
Average total compensation is in the high-six-figure-to-low-seven-figure range; an MD doing decently at a large firm should earn at least $1 million per year.
Again, cash compensation will be far lower at bulge-bracket banks because of the bonus deferral, which is one reason why elite boutiques have been on a recruiting tear.
In Other Groups, Countries, and Cities
Compensation does not vary much between different groups at the Analyst level.
Even if your group’s deal flow is poor, you’re not going to earn much less than Analysts in other groups because it’s not your responsibility to close deals.
After New York, the biggest market for investment banking is London, and Arkesden publishes helpful compensation reports there.
Standard base salaries for Analysts are £50K, £55K, and £60K for 1st, 2nd, and 3rd Year Analysts; average bonuses are £30 – £35K, £35 – £40K, and £40 – £50K.
At a 1.40x GBP/USD exchange rate, those numbers equate to lower compensation than in the U.S.: $115K through $150K rather than $140K through $200K.
That’s so much lower that I almost doubt the numbers; Is Brexit to blame? Or is it the bonus:salary cap? I don’t know.
Associates in London earn base salaries of £80K – £120K, while VPs earn base salaries of £140K – £160K.
Total compensation ranges from £120K through £220K for Associates and £250K through £350K for VPs (also significant discounts to U.S. pay).
No, I don’t have the numbers or any sources for Canada, continental European countries, Australia, Hong Kong, China, Westeros, Wakanda, etc., but feel free to contribute if you do.
Why Does This Matter?
It’s always fun to look at compensation figures, see what everyone else is earning, and then calculate your effective hourly rate while binge-drinking (my favorite is Laphroaig, but it’s an acquired taste).
But I’m sharing these numbers and explanations to make a few other points as well:
Point #1: You Will Not Save Much Money from Your Base Salary Early in Your Career
An $85K base salary is about $7,000 per month. After taxes in NYC, it’s about $4,900 per month.
You’ll spend at least $2,000 per month on a small apartment, and more likely $2,500+.
So, now you’re down to $2,400 – $2,900 per month.
Then there are student loan payments, meals, transportation, going out occasionally to preserve your sanity, and so on.
Even if you live very frugally, you’re unlikely to save more than $2,000 per month, and you might save as little as $1,000.
Saving $12K to $24K per year is pretty good for a recent graduate, but it won’t make you wealthy anytime soon, and it’s very low compared to your after-tax bonus.
That’s why it’s so important to earn a high year-end bonus, avoid “investing” your entire bonus in Bitcoin, and then to keep moving up, go to the buy-side, or start a business if your end goal is to become financially independent.
Point #2: Investment Banking is Not a “Get Rich Quick” Scheme – It’s All About the Long Game
Let’s assume that you need $10 million to feel comfortable with an “early retirement.”
Let’s also be generous and say that you’ll save 40% of your pre-tax earnings each year (deduct 50% for taxes and 10% for other expenses) and that you’ll need 10 years to reach the MD level. You will also earn toward the top-end of the total compensation range each year.
After 10 years, that amounts to about $1.4 million in savings.
If the markets have performed well, and you’ve invested everything you’ve saved, perhaps you’ll have ~$3 million.
That’s a good sum of money, but it’s not enough to retire at age 30-35 in New York City.
Once you become an MD, you might be able to earn $1 million per year and save half of it; that’s $5 million after another 10 years.
Yes, maybe you could move up more quickly, earn more than $1 million, or do incredibly well with your investments.
But the basic point remains the same: You’re looking at retirement in your 40s, at least if you want to keep living in an expensive city.
Most people would call that a good outcome, but it’s still far from “get rich quick.”
If you want to get rich more quickly, you have to start a business, become a successful investor, move up rapidly in a buy-side role, or use time travel to join Facebook in 2004.
Point #3: If You Want to Make Money Much More Easily, Go into the Tech Industry
As finance pay has fallen, pay at tech companies, especially for engineers, has risen.
You’ll still earn more in cash compensation as an Analyst in IB than you would as an entry-level engineer at most tech companies, but the difference is quite small. And once you factor in stock, all bets are off.
Just as one example, take a look at this report, which pegs the average base salary for engineers at Google at $142K; with stock and the annual bonus, total compensation is $203K.
The numbers at Facebook are even higher – $153K base and $225K total.
And you earn those amounts with far less work: normal, 40-50-hour weeks rather than 70-80-hour ones.
Admittedly, smaller tech companies pay below those numbers, progression up the ladder is slower, and the pay ceiling is lower unless you move into an executive role, so there are some disadvantages as well.
But as I’ve been saying for several years, if you want a comfortable lifestyle where you earn in the low-to-mid six figures and have free time, join a large tech company.
So, What About Those Annual Bonus Predictions and Reports?
Now, back to that point I made in the beginning.
I stopped writing annual bonus predictions and reports because they stopped being useful – there was no longer one standard bonus, banks started paying bonuses at different times, and pay between banks began to vary.
Also, my strategy of using the bank’s IB revenue growth rate to determine the bonus growth rate became less predictive over time.
Finally, quite honestly, I lost interest in this topic.
I’ve now been out of the industry for almost a decade, and it’s hard to care about bonus numbers when they barely affect me.
I have received many requests for compensation summaries, though, so I plan to consolidate everything in this article and update it periodically.
That could last for a long time, even if the annual articles go the way of pre-financial-crisis bonuses.
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