When it comes to word association, “Wall Street” and “money” go together like peanut butter and jelly. Whether through news stories about millionaire bankers or popular representations in TV or film, Wall Streeters and big salaries are always linked.
Yet how much does your typical analyst, banker or executive really earn? Do their salaries and bonuses live up to such lofty reputations? Or is Wall Street compensation not quite as stratospheric as we’ve been led to believe?
Let’s find out.
Investment banking compensation
Investment bankers play a critical role in the financial industry, helping firms raise capital for events such as an IPO, a merger and other transactions. Their compensation is generally two-fold: base salary and bonuses. In many cases, the latter is vastly larger than the former.
Analysts, often hired directly from college, fill most entry-level positions. Most of the real grunt work is performed at this level. Analysts work long hours doing a range of tasks: financial research, Excel spreadsheet work, and catering to the whims of senior executives. Many analysts pursue graduate studies simultaneously, making the lifestyle even more demanding.
The Federal Bureau of Labor Statistics (BLS) estimates most investment banking analysts earn between $75,000 to $110,000 annually. At this level the bonuses for which Wall Street has gained such notoriety aren’t quite so large — although they can easily exceed tens of thousands of dollars.
While that compensation may sound modest, it’s important to remember that it’s merely an average. Competition for elite young analysts is far higher.
Working as an associate is the next step up. This position is the logical progression for MBA holders. The BLS estimates associates earn around $120,000 annually, with bonuses rising significantly.
Successful associates become vice presidents. This is where the pay scale accelerates dramatically. An investment banking VP typically earns a salary of at least $250,000 with a six figure bonus.
Managing directors occupy the next rung on the ladder. The BLS estimates the total compensation package for a managing director at well over $400,000 per year. That’s excellent money — but perhaps not the insane level of wealth many people associate with investment banking.
That’s not to say those salaries don’t exist — the BLS numbers are merely averages. An ultra-successful, high-level investment banker can still earn tens of millions of dollars in a great year.
Hedge fund compensation
If the world of finance had rock stars, many of them would no doubt manage hedge funds. Top fund managers are often superstars in the industry — with compensation levels to match their outsized reputations.
It’s not all glamour and money in the beginning, however. Much like investment bankers, hedge fund analysts perform a lot of work for a (relative) pittance. Hedge fund analysts evaluate markets, sectors, subsectors and even standalone companies, all in an effort to sniff out trends and investments.
Like their fellow analysts in investment banking, total compensation is generally limited in the beginning. The BLS reports hedge fund analysts average about $110,000 in salary.
Rise past this level, however, and the financial rewards are impressive. Senior hedge fund portfolio directors often reach seven figures in total compensation. And hedge fund managers? The best of them earn astonishing wealth — we’re talking billions, not millions.
PE and VC compensation
Finance neophytes often confuse private equity and venture capital. It’s an easy mistake. Both involve investments in companies with the goal of making a profitable exit. Then there’s also the whole “two letter abbreviation factor.” Yet the distinction between the pair is a simple one.
Venture capital firms primarily fund very early stage start-ups with high potential for growth. Think something like Facebook or Twitter in its early days. This money is vital for helping companies survive and scale.
Private equity firms usually buy into companies that are more established in the market. Often these firms are underperforming or troubled in some way. By cutting costs and often introducing new management, a PE firm can theoretically improve a company’s prospects — then exit with a profit after five or six years.
If you’re looking to make money as quickly as possible, private equity is an excellent choice. According to a recent article in the New York Times, some large PE firms are paying associates more than ever — and nearly double what an equivalent investment banker earns.
That pay scale is grabbing the attention of young analysts and associates. The New York Times also reports that private equity is now the number one destination for Wall Street’s junior-level employees — more than one-third of junior bankers on two-year contracts in 2012 have switched to a PE firm.
While associates are earning starting salaries that can exceed $300,000 in some cases, compensation has likewise increased for senior partners. Vice presidents often earn seven figures in annual compensation. The best compensated managing directors can make tens of millions.
Venture capital compensation isn’t quite as overheated at the moment, yet it still measures up well. Analysts generally earn around $100,000 to $150,000. Experienced associates and vice presidents are compensated at several times that level.
As always, the real money is at the director level, where compensation packages in the millions are normal.
The truth about Wall Street salaries
Are Wall Street salaries and bonuses high? There’s no doubt about it. If earning money is your primary criterion for a happy career, there’s no better place to get started.
Yet not everyone on Wall Street is exorbitantly wealthy. A starting salary of $90,000 for a freshly-minted college graduate sounds impressive at first. Yet after you consider the 80-hour work week and the elevated cost of living involved, that Wall Street salary doesn’t seem so inflated,
Like in any other field, your ultimate financial success is what you make of it. On Wall Street, however, the potential payoff for that hard work is enormous.