Graduates face tortuous path to investment banking riches

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Graduates going into investment banking can be forgiven for thinking that untold wealth is theirs for the taking.

The media is full of stories of seven-figure earnings for traders and research analysts with just a few years experience (or at least it was until the economy went sour this year). Since 2000, even pay for graduate trainees has soared.

However, in reality extremely high pay is the exception rather than the rule, and achieving it requires hard work and careful planning.

For graduate entrants, there are considerable variations between pay at different firms and for different positions. In 2001, starting salaries in the UK ranged from below 30,000 up to 35,000 for graduate trainees in investment banking. The bulge-bracket firms, as the biggest and most successful are known (eg Goldman Sachs, Morgan Stanley) tend to pay the most.

But salaries are just part of the picture. For most graduate trainees, pay has four components: a sign on bonus (of up to 7,500) a relocation payment (of between 1,000 and 3,000) salary (of up to 35,000) and a performance-related bonus, which banks say is unlikely to be more than 5,000 this year.

This contrasts with associate entrants at MBA (Masters of Business Administration) level, who are often paid a sign-on bonus, a salary, and a guaranteed bonus of around 30,000.

Graduates set on becoming millionaires must look past the opening gambit to the pay differences that emerge over time. These are based almost entirely on the differing size of bonuses, and these in turn depend to a large extent on personal performance (as well as the performance of the team to which an individual belongs and of the bank as a whole).

Vincent Thomas, head of development and education at Barclays Capital, said: &quotIn the first year, we make little distinction between graduate trainees in terms of pay. But from then on it is performance-related.&quot

Vivienne Dykstra, head of graduate recruitment at Deutsche Bank, commented: &quotBonuses rise the most quickly in the client-facing areas of the front office: equities, corporate finance, and sales and trading.&quot

Bonuses were typically lower in back office areas that do not generate revenue such as operations, HR, and to a lesser extent, IT, Dykstra added.

Andrew Lowenthal, global head of financial services recruiting at Egon Zehnder, the headhunter, said that most people in financial services earn a &quotmodest&quot salary which seldom exceeded 100,000. In most cases, bonuses add only an additional 50% or 100%.

But for some rare individuals, bonuses can be many multiples of their salary. Many of these people are product specialists in, for example, derivatives, or senior level developers of new business, Lowenthal said. Their pay is calculated according to the revenues that they generate for their employers.

Many years and much hard work stand between graduate trainees and senior revenue generators. But bonuses start to vary as early as the second year of employment.

The US banks have traditionally paid higher bonuses, as a percentage of total pay, than European-owned ones. That has been changing, with Deutsche Bank, UBS Warburg, Dresdner Kleinwort Wasserstein and ABN Amro among others moving towards a US-style pay structure .

But bonuses are a double-edged sword. Even employees in the right jobs at the right banks are unlikely to receive hefty bonuses in the current economic climate. In 2002 and 2003 they are likely to be considerably lower than at the start of this year, when they reached record highs.

Headhunters expect equities staff to have bonuses slashed by up to 50%, for example.

Recruiters are even speculating that graduates' starting pay may fall in future, after holding steady in 2001. &quotWhen times are tough you have to look to the bottom line and graduate trainees do not make much of a contribution,&quot says a recruiter in a European bank.

However, recruiters agree that if graduate pay does fall, it is unlikely to do so significantly. And instead of salary, it is the 'hidden' aspects of the package, such as the signing-on bonus and the relocation bonus, that are likely to be cut.