The Current Promotion Cycle for Investment Banking Analysts
So I just got word that Goldman Sachs is announcing a pretty dramatic policy shift in the promotion cycle of investment banking analysts right out of college.
Traditionally, investment banking analysts would work for two years and then jump to a private equity firm, hedge fund, start up or some other role in corporate finance. The rare breed that could withstand the 100 hour work weeks would sign up for a third year. Most of the best & brightest would move to greener pastures where they could work a measly 70-80hrs/week on average and earn the same (or in some cases of the top PE and hedge funds, significantly more).
Now Goldman Sachs has announced that instead of a third year as an "analyst", these third year analysts would be directly promoted to the Associate level -- along with the typical $50-100k pay raise (including bonus) that comes along with that title.
Now there is no doubt in my mind that the majority of the analysts that have completed two years of boot camp can make very successful associates for the firm. I'm just not convinced that this will move the needle enough to retain the most talented of the bunch...and here are my three main reasons why:
1. It's More Than Just Immediate Pay
While this direct promotion will reduce the pay gap between pre-MBA PE associate positions and the third year at an investment bank, I still think the best of the best will choose to go to the buyside. Why? These young overachievers realize very early on (thanks in large part to the glorified BSDs of mega PE funds and mega HFs in the media) that the outsized pay opportunities come when you are a partial owner in the form of carry.
No matter how fast they move up the ladder, banking is still the safer route with relatively lower pay. It sounds crazy when we say that these kids would scoff at $300k+/yr, but let's look at this objectively:
Option 1 - Banking: If you are good, steady promotions and at a top bank if you make partner, you're easily clearing $2-5m/year. Amazing, right?
Option 2 - Private Equity of Hedge Funds: If you are good, steady promotions and the possibility of raising your own fund. If you are successful at raising your own fund, even if it's only $100-200m to start, if you have decent returns, the LPs will typically reup. Eventually, if you run a shop with 2-3 other partners and are managing over $1bn, your average annual compensation can spike dramatically. We're talking in the $10+m range. Granted, this option is significantly more risky, but it is also more enticing for the brightest financial minds (that are not as risk averse).
That's the magic of carry ...basically, becoming an owner instead of staying as an employee of a big bank can lead to insane returns. It's the same reason why banks are also fighting the drain of talent to Silicon Valley. Even though most start-ups fail to materialize into the next Uber or AirBNB, the potential of out-sized returns is very tough to resist.
2. Where Are Your Skills?
The junior finance professional would be wise to focus on building a strong foundation of skills across a variety of functions. Someone who sticks on the sell side indefinitely will likely make a great banker, but I'd argue that they will rarely get to think as an investor.
They will be more focused on impressing the client with beautiful decks than actually thinking about whether a specific deal makes sense or putting their own reputation or capital at risk. While there is nothing wrong with this, I think most junior analysts instinctively know that deciding so early in their careers that they want to be "bankers-for-life" is limiting their options.
Any trader will tell you that options have value...so why would these analysts feel the need to stay when they can do two years on the buyside, get into a top MBA program and then jump right back to banking if they so please? Why do so few pre-MBA bankers go back into banking?
To be fair, I think Goldman and some of the other bulge bracket banks have been addressing some of the work-life balance issues, but I'm not convinced they have done enough to compete with the options, "prestige" and potential for out-sized returns that the top private equity or hedge funds provide.
3. The type of work
Let's be honest. After 2 years of working in investment banking, the work can get monotonous. Goldman is smartly trying to address this with allowing the third years to transition to new groups, and they are paying lip service to technology that reduces some of the grunt work. (would love to get WSO's view on this)
However, the reality is that the work is still incredibly repetitive. So is a lot of work on the buyside, but at least after two years of long hours, it's a new type of repetitive. At least there are new skills being developed and at least these kids can dream of one day running their own fund.
What do you guys think? What percentage of analysts jump ship now after two years (75-85%)? What percentage do you think will jump after this new policy? Do the bankers on WSO disagree with me?
My best guess is that it may increase retention by ~5%, but I doubt it will have the dramatic impact Goldman is hoping for...I welcome your thoughts!
Stay Strong,
Patrick