Monday, April 25, 2011

Banker pay

Higher base, smaller bonus, more of the bonus in equity with long term vesting. I'd love to see the risk-adjusted return from a career in finance fall below that for a technology entrepreneur. But I doubt it has yet.

WSJ: ... the numbers—the real numbers—for mid-career investment-banker salaries.

The paymaster noted that median precrisis pay was about $2.2 million a year. On average, some $200,000 came in base pay, with the remaining $2 million coming in an annual bonus, about 60% of which was paid in cash.

That is roughly $1.4 million before taxes, leaving after-tax take-home cash of about $700,000 a year, he calculated. That is slightly less than at the banker-pay peak of the early 2000s.

Today, the paymaster said, median banker pay is about $1.6 million. Base cash pay is higher, at about $400,000. But now, the bonus portion has been flipped. About 60% to 70% comes in the form of deferred compensation, largely in company stock.

That means there isn't nearly as much cash coming in during the first year of the pay package. Roughly speaking, that comes to about $380,000 in after-tax cash. A princely sum by most standards, but quite a comedown for anyone conditioned to take home nearly double that.

The smaller annual cash payout might mean fewer days of vacation at the Atlantis or one less domestic helper, but the deeper issue is the amount of pay that is deferred and dependent upon the long-term success of the bank.

This calls into question the grand bargain of investment banking.

In the precrisis days, bankers would work ungodly hours, fly halfway around the world at a moment's notice and kiss up to clients and superiors, all for the promise that they would retire rich in their 40s or early 50s. It was like working a job that had a very lucrative pension.

Now, with so much of his or her compensation at risk, the prospect of the banker toiling deep into his 50s or even his 60s is very real.

The surprise is, this has less to do with direct regulation of pay and more to do with the profitability of the business itself.

A weak economy, tighter rules on using leverage and higher reserves are indirectly hitting salaries. Investment banks just aren't making money like they used to. "The reality has only partially sunk in," said the paymaster. "It's harder to put the kids through school."

The other dream for bankers was to hit it big with one great year. But that too is getting harder. Top bank officials across the Street report the number of $5 million earners has fallen significantly since the crisis. The once-vaunted "$10 million man" is the rarest of breeds. Today, a $5 million salary puts a banker at the 90th percentile for pay, according to the paymaster's figures.

The long-term deferred-compensation packages are chilling the banker labor market, because unvested shares disappear when a banker switches jobs. Even "garden leaves"—the mandated vacation time between an old job and a new one—have extended to 90 days from the precrisis 60 days. With fewer people switching posts, there is less activity in the entire system, which has the effect of keeping salaries down.

See comments for more! My guess at a career payoff table:

Individual is a smart, conscientious, driven kid with Tier 1 credentials. But no superpowers ;-)

startup / tech

mid: ~$200k/yr, no hits, stuck working for big company as VP, no early retirement

90th: small hit, makes a few million, still working as above

99th: big hit, makes >$10 million, retires early, maybe rinse and repeat

99.9th: big, big hit, $100M payoff, livin' large :-)


mid: ~$400k/yr, lives in NJ, can't retire

90th: ~$2M/yr for 10 years (mid-career), retires at 45-50 with $7-10M put away

99th: same as above but with several times higher net worth and earlier exit.

A professor comes out (financially) behind both of these tracks, but perhaps happier, more relaxed, more job satisfaction.

If we further restrict the group of individuals to Tier 1 PhDs in physics, it seems to me that the 90th percentile outcome in finance described above is more like 60-80th percentile.

Startups give you the possibility (but at long odds) of cashing out earlier. I would guess startup guys like their work better than finance guys -- they are often idealistic and want to change the world with their technologies. But risk-adjusted return seems higher on the finance track. I would be interested to hear how the payoffs for, say, an HLS or HBS or HMS grad compare to the above.


LondonYoung said...

IMHO, the median pay of a banker who could have been a tenured professor is about $400k. Considering the life guarantee of employment for tenured professors, and all the perks of being in the academy, it strikes me as a break-even proposition nowadays. But what does a technology entrepreneur make? This seems really opaque to me. I think the richest Ph.D. physicist made his money selling submarine sandwiches, right? Does he count as a technology entrepreneur?

Methinks that going into banking is not now, nor ever has been, an ex-ante slam dunk choice. Ex-post it sure did work in the 1990's though!

David Coughlin said...

I need some clarification, when you are referring to 'bankers' are you talking traders, M&A guys, both, ... more?

LondonYoung said...

I mean people with tier 1 academic credentials employed by tier 1 financial institutions in producing roles. Traders and M&A guys are a subset of the group I have in mind. Add in quants, salespeople and asset managers and that, more or less, rounds out the mix.

steve hsu said...

Who is the sandwich guy?

steve hsu said...

When you say median pay is $400k for someone who could have been a tenured prof, do you mean that this subset of people make less money in general than the people described in the article? Perhaps because they are on the nerdy side?

LondonYoung said...

Sandwich dudes and other "non-revenue" types not in my imagined sample set.

LondonYoung said...

Nope, I don't mean geeks are paid lower, I mean the paymaster's numbers are based on all sorts of evil biases such that they are not representative.
The first warning sign is the word "mid-career" - what does that term even mean when most people don't last very long on the sell side?
What the Paymaster is saying, I think, is that "for people who have turned about to be very successful in banking and have achieved long tenure, and are still on the fast track - those people are pulling in a couple of bucks a year".
I think I could agree with the paymaster if this extract started with "the numbers—the real numbers - for top investment bankers in the prime of their earnings potential".

The main problem is that this is an industry whose nature changes meaningfully every few years. A 25-year working lifetime will be stitched together out of half a dozen jobs, the nature of each not being very predictable based on the last. If one emerged intact from the internet bubble with ten year's experience, the mid-2000's was a fantastic earnings period on Wall St. But that party is closed to new entrants, and those still at the party are gradually being shown the door ...

David Coughlin said...

OK I'm good with that definition. I work with a guy with a PhD in EE from P ∈ HYPS, and he is frustratingly rigid and unwilling to take shots. But, we are not a Tier 1 finance joint, so he's out of your selection. So for this discussion, we are talking Tier 1 Academic Credentials && Tier 1 Tech Entrepreneurs. These are not going to be your average tech entrepreneur.

It's hard to draw average case pictures when the outcomes have high skew [you knew that, though] but in light of your responses to Steve, I offer these guys for a tracking study. It helps that they have tech-entrepreneur lineage, being in the David Cheriton-Andy Bechtolstein family trees. Keiran probably fits into your group. I suspect that when they exit in 2-7 years, Keiran will get something in the vicinity of $20M - $200M.

LondonYoung said...

Mmmm, and I will add the tech entrepreneurs can be much more tax efficient in converting their gross pay into personal consumption. Offshore vehicles and lower cap gains work wonders. Your typical American citizen Wall Streeter pays the top marginal tax rate on wage labor. However, I think a lot of tech entrepreneurs never make more than their $100k draw since not enough ideas "hit". On the street your odds are making that $400k are very good - though as Steve has pointed out before, you would struggle to live in midtown and send kids to private school on that money. You'll basically be living in a suburb with good schools, and taking a train to and from work.

steve hsu said...

Here's a payoff table for you -- tell me if you agree :-)

Individual is question is a smart, conscientious, driven kid with Tier 1 credentials. But no superpowers.

outcome/percentile: mid (median), 90th, 99th

startup / tech

mid: $200k/yr, no hit, stuck working for big company as VP, no early retirement

90th: small hit, makes a few million, still working as above

99th: big hit, makes >$10 million, retires early, maybe rinse and repeat

99.9th: big, big hit, $100M payoff, livin' large


mid: $400k/yr, lives in NJ, can't retire

90th: $2M/yr for 10 years (mid-career), retires at 45-50 with $7-10M put away

99th: same as above but with several times higher net worth and earlier exit.

A professor comes out behind both of these tracks (financially), but perhaps happier, more relaxed, more job satisfaction.

RKU1 said...

Well, it seems to me that a pretty reasonable way to view the proper role of the finance industry is that it just represents a sub-sector of the broader transportation industry. Most transport moves physical goods from place to place, but finance moves intangible measures of stored value from those individuals or organizations with a (temporary) surplus to those individuals or organizations with a (temporary) shortage.

Obviously, the transport industry is a necessary component of a well-functioning society. But suppose "transporters" became more and more powerful, and began keeping a larger and larger share of all the goods they transported, whether legally or because "the boxes fell off the back of the truck" or something. Eventually, people would start to notice that they were getting poorer and poorer while the "transporters" were getting richer and richer. This might naturally cause more and more people to decide to switch from working in actual production to working in transport, and lots of theorists would explain that the relative success of the "transporters" meant that transport was far more valuable to society, should be given all sorts of special benefits, and grow to include a larger and larger fraction of total employment. After all, if all the "transporters" were rich, then if everyone became a "transporter", everyone would be rich, no?

There would be ferocious struggles as different groups of transporters tried to hijack each other's cargo and become richer still.

I think a few years back Paul Volcker argued that the only useful financial innovation of the last 30 years as the invention of the ATM machine...

David Coughlin said...

'... a lot of tech entrepreneurs never make more than their $100k draw since not enough ideas "hit".'

I agree with this in principle, but I think it is a comment on a different group than our hypothetical high-achieving highly-capable smart-guys. Many JoeBob's who write HTML pages and use stylesheets fancy that they are tech entrepreneurs. I think Steve's characterization of the group we are talking about is fair. The fallback-and-regroup position is to be a sales-engineer-apparatchik at VeryLargeTech Co. I agree with this as the median outcome if the lesser outcomes entail retreat from the industry.

marco loconte said...

My take on HLS:

50th percentile - White-shoe washout, went in-house somewhere, makes 200-250K/yr.

90th percentile - White-shoe partner, makes 1-2 million/yr.

99th percentile - Are these percentiles for money or talent? All the smartest lawyers I know became judges or academics and make no money at all. I had a (very) ambitious friend who got out of the legal field because there were no monetary returns to talent above the 90th (or so) percentile.

LondonYoung said...

While Volcker was running the Fed there was a much more important innovation - interest bearing checking accounts and money market funds. It was his job to stop these things which had been forbidden since the reforms of 1933/34, but he didn't. IMHO, no failure of financial regulation since the depression was greater than Volcker's failure there. At his feet, I place the financial crisis of 2008.

LondonYoung said...

I like this table - no arguments here. I would add one comment. A tenured professorship is pretty darn close to an inflation indexed perpetual bond with no corpus. So, one might want to NPV this out when considering the professorship path. Add in free health club, private restaurant membership, gold-plated health coverage, etc ... and - if you are like many of us - the job is arguably as pleasant as retirement. I would NPV this at about $4mm.

LondonYoung said...

again, IMHO, I think these numbers look right. But this is specifically for HLS, not just any "top law school".

steve hsu said...

Percentiles are for financial success. In the other examples we assume no additional info on the individual, so we're just talking about probability of reaching a particular financial milestone.

RKU1 said...

Well, perhaps. But when an official comes into office during a gigantic financial crisis, takes steps which are almost universally praised as having resolved that crisis and established prosperity, but also permits things which (arguably) eventually contribute to a totally different sort of financial crisis three decades later, well, I think he's usually accounted a hero.

Still, it's perfectly reasonable to trace the roots of our current financial problems back wherever they may lead. These clearly include some of Volcker's actions in the late 1970s. And certainly Roosevelt's banking changes, such as Federal Deposit Insurance, in the 1930s. And the creation of the Federal Reserve in (?)1913. And Lincoln's Greenbacks of 1861. And those rebellious Colonists of 1776. And most obviously, the totally ineffective efforts of Harold of Wessex to suppress French illegal immigration in 1066...

LondonYoung said...

To be fair to Harold, he also took office in a time of crisis ...

dabacon said...

Man I wish my being a prof came with free health club and private restaurant membership (we pay for both here at UW :( ). Anyone have any link to median faculty salaries as a function of time (are faculty better off today than their peers thirty years ago?)

ohwilleke said...

"The reality has only partially sunk in," said the paymaster. "It's harder to put the kids through school."

Only if you are Mr. bin Laden, Sr. and have 50 kids.

Sam H said...

I would say that the NVP a job as a Fed is at least $4mm, assuming one gets a job that lets one crawl up to the GS-13 to 14 level or so. They get tenure, don't have to work too hard, get excellent health insurance, and get a great vacation package; on top of all that they can retire at a fairly early age with a nice pension. 

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