How Much Money Do Investment Bankers Really Make

Investment banker pay is a popular topic.  It is picked on by governments, criticised by media and either envied or derised by the public, depending on the individual. 

Most of all, it’s a topic zeroed in on by investment bankers themselves – after all, there aren’t many (if any!) industries out there where pay is so directly tied to sense of self worth.

But how much do investment bankers REALLY make?  Is it really such a secret?  And is there more to it than just the headline numbers?

How Much Do Investment Bankers Make?

It always surprises me this should be such a popular question because there are some very reliable stats out there on investment banker pay – particularly at the junior and mid-level. 

By the time investment bankers become more senior (I am talking director and managing director level) the pay differential becomes so stark that comparisons stop making sense.

For the analysts, associates and vice presidents, who represent the majority of investment bankers by number, the numbers are widely available from sources like Arkesden

If you are not intimately familiar with the industry, the three titles referenced above represent the career stages of an investment banker who would start out immediately post university.  Collectively, it takes about a decade to go through these three stages before one reaches the director level. 

The data below summarizes the latest headline compensation numbers.  While they look punchy at first, there are some important caveats, which I will get to down below.  But first, let’s get the juicy stuff out of the way.

The headline numbers, of course, is not where it stops.  Like it or not, the kind of comp levels we are talking about here attracts some hefty tax rates.  And despite what people like to think, investment bankers do pay their share of tax. 

This is true at both the junior and senior levels.  Of course, there are odd stories of senior bankers (I’m talking vice-chairman level) moving to Switzerland to take advantage of lower tax rates.  Others set up their own firms and provide “advisory services” to the firms they work for. 

That being said, I have rarely come across these situations in my career.  This is partially due to the fact that no one likes to publicize such arrangements.  More often than not it is because the industry has become much more transparent over the past decade and banks (and bankers) just don’t want to be perceived as tax dodgers. 

So what do the numbers look like after tax?  Not as punchy as the numbers above, but still incredibly high when you compare them to the average London salary of about £35k pre tax. 

How Much Tax Do Investment Bankers Pay?

Despite all the complaining that may be going on, I actually think the tax rates are quite reasonable.  In some other countries with a high standard of living the combined tax rates on high earners exceed 50%.  If you keep that in mind, paying 44% combined income tax and NI on an income of £300k+ isn’t too bad! 

After all, someone’s got to fund the NHS, the schools, the parks, museums and all the public infrastructure we all enjoy. 

The other investment bankers who read this may challenge me.  They may say that we don’t really use the NHS (true, I mostly go private).  Their kids are more likely to be in public schools (true, my child is signed up to one already).  That, however, is beside the point.  If we want to, we could take full advantage of everything this country has to offer.  It is only right those services come with a price tag. 

How Much Do Investment Bankers Save?

This is where it all gets slightly complicated.  I have seen many a first year analyst rock up to the office on their first day feeling like the king (or queen!) of the world. 

No more slaving away at uni!  No more stressful interviews, back-breaking internships and relentless networking! 

Bring on the expensive takeaway lunches, dinners and drinks at expensive places (assuming they can get out of the office).  Weekend city breaks, yacht weeks in Croatia, expensive ski holidays, Rolexes, brand new BMWs – I have seen it all. 

Of course, while £82k / year is fantastic comp by all accounts, no one who makes £82k and is in their right mind would actually live the lifestyle outlined above.  So why is it that junior bankers fall into the trap so often?

Part of it has to do with having worked so hard for such a long time to land that coveted investment banking job.  Then there’s the peer pressure, the time constraints, the lack of social life.  Finally, for those who have one, there’s the desire to make it up to your partner for not being able to spend enough time with them.

How Much Money Can You Sock Away In An Investment Banking Job?

Leaving the extravagant spending habits aside, what does the saving profile look like for someone who manages to keep a lid on their lifestyle? Let me try and take a stab at it.

I am assuming you can keep your spending to £2,500 / month as a 22 year old living in central London.  This is generous but not ostentatious – and it includes holidays and major one-off purchases.  Let’s also say you are able to keep lifestyle inflation in check and only increase your spending by about 10% a year. 

The table below summarizes the potential savings of an investment banker who manages to follow the above guidelines.

Keeping lifestyle inflation in check is not easy.  For those who manage to do it, the rewards can be immense. 

I can think of few professions where you can start putting away £25k in post tax savings at the age of 22.  There are even fewer professions that allow you to save £100k per year six years into your job – provided you can keep your hedonistic temptations at bay!

So How Rich Will You Get As An Investment Banker?

So bringing it all together, what is the net worth profile of someone who managed to snag an investment banking job right out of undergrad?  Someone who then managed to keep their job (!), keep their spending habits in check and invested their savings? 

Will you become a millionaire by the age of 25 and quit working altogether?  Or does it all only add up to a slightly nicer watch and suit and perhaps a hotel with one extra star when you go away in August? 

I have created a little excel spreadsheet to illustrate what the numbers could look like. 

Let’s assume you are that disciplined individual above and you manage to consistently save 50% – 65% of your income.  Let’s also assume for the moment you are entirely happy putting all of that money in the stock market for some long term capital appreciation. 

With an annualized rate of return of 6% (which is conservative based on long term performance), the numbers start to add up quite quickly. 

Of course, this also assumes you don’t hit a massive market meltdown along the way.  Not only it would hit your stock portfolio real hard, but the reality is it could also mean your bonus is wiped out and your job at risk.

Is Investment Banking Worth It?   

Investment banking is a career that requires massive sacrifices.  A junior banker’s lifestyle can be nothing short of horrible for months, even years on end.  The job is stressful, the pay can be very volatile (it is not unusual for the numbers above to fluctuate by at least 30 – 40% per year and the volatility increases as you get progressively more senior). 

More likely than not, your physical health will take a massive hit – and there have been some well-publicized mental health consequences.  Many bankers that I know have been divorced multiple times, some just get used to the lifestyle and end up being single and childless. 

That being said, for those who want to make the sacrifices and are able to get their foot in the door, the rewards can be enticing.  Waking up on your thirtieth birthday with £750k in the bank can surely make up for 8 years of hard work.  This is especially true for those who managed to find a bank / group / role with a path to a reasonable work life balance.  But will you be sailing into the sunset on the Eclipse?  Highly unlikely. 

Readers, what do you think?  Would you trade 8 years of hard labour for £750k in the bank at the age of 30?

 

 

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