Friday, July 30, 2010

I'm Doing it For the Money

Two years ago around this time period, I received my first investment banking analyst bonus. The process went exactly the way authors have described it in books and directors have portrayed it in movies.

Your phone rings and from the caller ID you see it's the head of your group. The big daddy. The brass of the brass. A big swinging dick (to borrow a term from Liar's Poker). He wants you to swing by his office. He asks that you walk in on your knees so as to make things go quicker. Okay fine, maybe that last bit isn't true, but that's how most analysts felt walking into these types of situations.

You sit down in his gigantic corner office with spectacular views of Manhattan. He tells you the following -
[insert analyst name], you've been a tremendous asset to the group this year. As you know, in our business we reward those who we value. We consider you a top analyst here at [investment banking firm]. Take a look at this and tell me what you think. 
He gives you a piece of paper with a number written on it. This is so old school, I think to myself. Anyway, this number is supposed to make all the ridiculous hours you spent working the past year justifiable. It plays to your greed and makes you think, maybe I can do this another year. You take a quick peek, smile and immediately offer your thanks. You never tell him what you think, that's a big no-no. Just take it and go as Russell Peters would say.

As twenty-three year olds, most investment banking analysts walked out that day with an additional $60,000 pre-tax in their pocket. That means for the year, they probably made around $120,000 pre-tax. That's a shit ton of money for a twenty-three year old right out of college. In fact, analysts starting in 2007 probably could've made $150,000 all-in if they had just graduated a year earlier and started working in 2006 before the whole financial meltdown began in mid-2007. An analyst bonus of $60,000 reflected bad times. Bad times indeed.

I was inspired to write this post when I was trying to figure out how much money I'll be "minting" next year as a public high school teacher. Per the Department of Education's handy salary schedule, you can see exactly how much teachers make based on longevity and education. You can see that the number of years a teacher spends in the system (longevity) is represented by the rows (e.g. 3A/3B = 3rd year teacher). The columns reflect additional pay bumps for teachers who have obtained more credits and degrees.

Per this chart, the average twenty-something public school teacher in New York City probably makes anywhere between $45,000-$55,000 per year (depending on your experience, education, etc.). Teachers don't get annual bonuses or performance bonuses. Maybe some overtime, but that's about it. What's truly sad is this: if a teacher spent twenty-two years (last row) in the system with a masters, they would make $100,049 per year at a maximum. That's still not as much as investment banking analysts make as twenty-three year olds. Awesome.

6 comments:

Anonymous said...

Is the teaching worth it?

NB said...

Great post dude. I've witnessed so many discussion between my friends to figure out why bankers get paid as much as they do. Not just compared to teachers, but to lawyers, doctors, whatever. One of the arguments is simple demand and supply. The other is that the basic substance of the job itself involves money, and the employers are systemically flush, therefore they get paid more. Be interested to know what you think.

Ahsan said...

Burney, read my interview with Nikhil from a year ago. We covered a lot of this stuff.

Yo Mista said...

@ Anonymous:
Of course it's worth it. It's worth every second of it! Read the rest of the blog... This post was just meant to call attention to the fact that people who play with other people's money are getting paid more in our society than those who are responsible for shaping the minds of our future leaders.


@ NB:
I second Ahsan's comment, it's a good post, here's the link:
http://us.asiancorrespondent.com/fiverupees/2009/03/conversation-with-wall-streeter.html

A big reason is because investment banks in general have relatively smaller business costs relative to their profits. Ibanks only provide an intellectual service if you think about it. Then they take their fees, pay off debt and utilities, and divide the remainder of the still-ridiculous profit amongst themselves. It's usually stated in the fee structure that a bank will make roughly 1-2% of a total deal value after deal costs (banker car trips home, banker dinner costs, production costs, etc). So, if a bank helps pull together a $1 billion deal, then it rakes in $1 million. Just on one deal alone. Then you have to consider the fact that banks have shit tons of groups pulling together these types of deals, not to mention equity and debt offerings.

You're right though, supply and demand is definitely a part of it too. Back in the early 90s, bankers still made a truck-load of money, but only at the upper-most levels. The monkey level positions were paid only moderately higher compared to other positions. Recall, the exciting spot in the 90s was tech - Yahoo, Microsoft, Cisco, Java, Google, etc. were attracting the most attention from college grads in those days.

Because salaries are "set" in stone by the Dept. of Education, education won't ever attract as many bright, highly motivated and prestige-seeking individuals as banks, consultancy firms, law firms, and Google will. As of right now, schools can't up and decide they want to pay teacher A more than teacher B. There is no merit-based pay structure. And even if there was, how do you justify it in poorer communities, where graduation rates are way below average?

Alpha Za said...

I think it does become a question of value; investment banking teams are tiny and the accumulated fees are massive. The 60k bonus for the analysts is hardly a dent. Remember, Investment banker create and pitch hundreds of deals each year, very few of which actually work out. but they don't own anything. they risk nothing.

Teachers, because it's typically the government who pays them are always under paid relative to value that they create because it's systematic. There is no crazy upside or profitability.

Alpha Za said...

I think it does become a question of value; investment banking teams are tiny and the accumulated fees are massive. The 60k bonus for the analysts is hardly a dent. Remember, Investment banker create and pitch hundreds of deals each year, very few of which actually work out. but they don't own anything. they risk nothing.

Teachers, because it's typically the government who pays them are always under paid relative to value that they create because it's systematic. There is no crazy upside or profitability.