INVESTMENT BANKING OVERVIEW
Investment Banking is an incredibly broad and multidimensional sector, which is quite often misunderstood. Ranging from boutique subject matter experts to multi-national, full-service conglomerates, there are around 3,000 Investment Banks operating globally today. The term Investment Bank is commonly used to define a financial firm which assists in the raising of capital in the form of debt (bonds) and/or equity (stocks). The term is used so frequently that its meaning often carries misconceptions. Many financial institutions are involved in investment banking to some extent; however, most have both investment banking functions as well as a sales & trading functions. Many employees within an investment bank report into the Sales & Trading division, where they can serve, for example, as Brokers or Traders. These employees should not be considered ‘Investment Bankers’ even as they are working for an investment bank. Simply put ...More »
CAREER PATH & CORPORATE STRUCTURE
Though every financial company has a unique structure and hierarchy using different characteristics and requirements to define each level, there are some similarities to allow a general pattern to be discussed. One consideration to make when looking into an organizational structure is the size of the bank. Investment banking divisions employ a total estimate of 40,000 people, more than three quarters of which are males.
When considering working for a large or small investment bank many people will prefer one strongly over the other, although they both have their advantages and disadvantages. Smaller companies will give employees a large amount of exposure to more senior managers and executives of a company 1. Working with people at such a level lends some clarity to the other roles in the company and teaches an employee a bit more depth into their domain by providing a role model, not to mention some excelle ...More »
STRATEGIES IN INVESTMENT BANKING
Because investment banks are always coming up with new ideas and products, the strategies they use to operate have a tremendous impact on their ability to be profitable and remain competitive in the marketplace.
Strategists play an important role in investment banking by utilizing quantitative models in considering companies and industries, they try to analyze or predict their needs and performance while taking into consideration the macroeconomic climate2. Strategists are in the front office of the investment bank and they have a large impact on the direction of the trading they do and the products the structure team will create.
When there is a public offering, the bank will purchase the securities from their client and resell them to another party at a higher price to make a margin on top of any fees associated with their services. There are two ways an offering like this can be structured. The first is when the bank tries ...
1.) University of Michigan "Office of Career Development Career Path: Investment Banking/ Private Wealth Management/Research/ Sales and Trading/ Financial Derivatives and Risk Management: Steps for Developing a Career in Securities; 4/13/2005 (Found on 7/18/2009)
10.) Princeton Review
As stated previously, compensation is known to be generous for investment bankers when compared to other industries. The amount of an employee's salary and total compensation is normally a function of the economy at that time, and it should be noted that the total compensation is not very predictable. The bonus payout in financial companies had a large peak in 2007, but in the beginning of 2009, many large investment banks were forced to borrow money from the government, known as TARP Funding. Because of the state of the economy and the economic position of these companies, most were unable to provide "decent" (or any) bonuses to their employees.
According to the Princeton Review, the average starting salary for an investment banker is $134,000 and the average salary for an employee after the 5 year mark is around $300,000. According to the same source, after about 10 to 15 years of service, a "good" investment banker can expect to make closer to $1 Million.
Interns: Interns are normally paid monthly salaries at an average of $5,000 per month with other allowances for overtime or for housing as applicable. Analysts who are recent college graduates (almost always from top universities) are often employees through a contract while they work toward an MBA.
Analyst: It is common for Analysts to make between $60,000 and $75,000 with a bonus on top of that. The average bonus for a first year Analyst exceeds $20,000 so this is normally the beginning of a more lucrative career. Usually their contracts last about two years, but some Analysts who have proven themselves might be asked to stay a third year.
Associate: Once a student receives his/her MBA, they normally start as an Associate. Associates are on pretty even ground as far as compensation is concerned. Most MBAs who move into sales or trading positions start out with a salary between $80,000 and $95,000 with a year-end bonus between $20,000 and $40,0007,2. Currently, most Associates make between $150,000 and $200,000 per year. Predictions for Associates compensation following 2009 are anywhere between $150,000 and $250,0002. The ranks after the Associate level vary greatly between banks.
Vice President: Vice Presidents, or equivalent roles, currently make an estimated average of $200,000 to $400,000 but are expected to take home a reward within the range of $350,000 to $1 Million once the effects of the 2008-2009 financial meltdown subside and firms return to historical profitability.
Managing Directors, Partners, Principles and Department Heads: Depending upon the organizational structure of an investment bank, the compensation for the more senior level titles can vary greatly. Generally, Managing Directors can expect compensation in the range of $500,000 - 1 Million. Partners or Principles are expected to receive as high as $2 Million and Department Heads can make anywhere from $800,000 to $70 Million. Clearly, there are wide ranges here and the parameters are difficult to define. The important concept to understand is that there is really not a limit on income, especially as one moves toward the top.
Golden Hand-Cuffs: In the last few years, many companies have added an equity component to their compensation packages as an incentive. It has been found to be a good way of keeping the employees working toward the organizational goals. Some people are less motivated by equity when it can take a few years before it can be liquidated, but this is done to retain employees.
HIRING TRENDS IN INVESTMENT BANKING
As in any other industry, some trends can be found in investment banking which makes it a unique profession. One of the first characteristics many will realize is that investment banks pay their employees fairly significant performance bonuses in addition to healthy base salaries. The bonus can range significantly depending on an employee's level of experience and/or knowledge, seniority with a particular company, level within their companies corporate structure, and their individual contribution to the company or measure of performance when ranked to their peers 6. Generally, bonuses can be computed as a percentage of the revenue that an individual or team has generated, typically between 0-10% of the revenue.
Each firm will vary a bit in what percentage they will offer, the time of year it is paid out, and the amount of the bonus is also a function of the economy in that year 6. One caveat: because investment banks tend to ...