This is How Compensation Works at Investment Banks

Hey!

Today’s newsletter is all about how compensation works at investment banks.

This is something you usually figure out once you’re in the industry, but there’s no harm in learning about it beforehand - after all, there’s more to it than you might think.

Compensation at investment banks is usually split into 3 main components:

1. Base Salary

2. Bonuses

3. Long-Term Incentives

It can all be commonly misunderstood, but once you understand how it all works you’ll be able to better navigate your career trajectory, negotiate effectively, and set realistic expectations.

In order to understand how investment banks compensate their employees, you first need to make sure you avoid a few common mistakes:

Mistake 1: Assuming that the base salary is the primary component of pay.

In reality, bonuses and incentives can often constitute a larger portion the more senior you become.

Mistake #2: Believing that bonuses are guaranteed and static.

Bonuses are performance-based and can vary significantly year-to-year.

Mistake #3: Overlooking long-term incentives like stock options or deferred compensation.

These can substantially increase total compensation over time but are often contingent on performance and tenure.

The reason people tend to make these mistakes is due to a lack of transparency and understanding of the different compensation components.

As a result, they end up with unrealistic expectations and ineffective negotiation strategies.

Let’s dig deeper on each of these.

I. Base Salary

First you have to recognise the role of a base salary.

Your base salary provides a steady income and acts as a foundation for the total compensation package. However, it’s only one part of your total compensation package.

For example, an analyst might have a base salary of $85,000, but their total compensation, including bonuses, could be well over $150,000.

II. Bonuses

The next step to understanding compensation is analysing how bonuses work.

Bonuses can often be several times the base salary and are closely tied to individual, team, and company performance. Most people believe bonuses are a fixed percentage of their base salary, which is incorrect.

Bonuses fluctuate and can vary widely depending on many factors, including market conditions and personal performance.

In a good year, a mid-level banker might receive a bonus that's 100-200% of their base salary, but in a down year, it could be much less or even nonexistent.

It’s always good to prepare for variability in bonuses and focus on performance in order to maximise potential earnings.

III. Long-Term Incentives

And finally, the last step to understanding compensation is recognising the value of long-term incentives.

Long-term incentives like stock options or deferred compensation can significantly enhance overall compensation. These incentives are usually available the more senior and tenured you are within the firm/industry.

For example, a managing director might receive significant stock options that vest (unlock) over several years, aligning their interests with the company's long-term success.

If they leave/quit the firm early, they’ll miss out on the stock options. It’s basically a way for the firm to keep its top talent.

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That’s all for this week. As always, thanks for reading.

See you next week.

Afzal

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