Goldman's New Policy for Investment Banking Analysts - 3 Reasons Why it Won't Stop the Bleeding to the Buyside
The Current Promotion Cycle for Investment Banking Analysts
So recently I 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
I was under the impression that in recent years as an analyst if you decide you want be a banker for life and you're decent it isn't very difficult to get a direct promote and basically stay for the long term anyway. And like I said, if you're decent. Does this mean that everyone who doesn't get a buyside gig or leave for something else gets to be an associate? This is an exaggeration but kind of like "ah screw it, I've got nothing better to do and they'll give me a big raise if I stick around."
I've yet to see this amazing technology Goldman is yammering about. The move is an added carrot, but it's trying to compete with a buffet. If you'd really like to solve the problem, I might suggest letting associates and VP's begin to build skills necessary for partnership- like rainmaking with clients. Analysts are leaving because so few of GS MD's make partner, and they can get partnership from the buy side within time. Those are my thoughts, anyway.
Wanna compete with Silicon Valley? Start acting/treating analysts like entry level Silicon Valley people. Make it actually fun to come to work.
The cornerstone of their new analyst program is all the new technology they "think" they can execute on to help analysts produce the analysis that they're paid/trained/hired to do....building bits and pieces into models, creating deck components, etc. The way it sounds, more and more of junior banker's tasks will become automated/template'd, under Goldman's new program, and, implicitly, as that happens they will develop less "hard" skills, ie. building custom models, which is what generically makes junior bankers coming off their 2 year stint so valuable to the buy-side, corporations, etc. It's a catch 22 really. IF they can execute on the technology end, which sounds like smoke and unicorn dust.
Another take is that the buy-side will simply respond in kind to Goldman's pay raise for 3rd year analysts, and salaries for pre-MBA and post MBA associates will rise, as will junior VP's and there will be some salary compression. It could also accelerate some of the analyst programs that have emerged in the last few years at some of the leading mega funds and upper-middle market guys, and they may just start training their own analysts in greater numbers to feed their own associate pool.
Where did you get this information? Will other banks/EBs do the same? When will this be implemented?
...the Wall Street Journal...
Depends on the bank. Chatting with other analysts & associates in my EB team, folks seem to view it as more indicative of a retention problem specific to GS rather than something we'd want or need to emulate
also on bloomberg
Gasp....something the all knowing Goldman intern didn't know? Impossible!
Several places have had this policy implemented for a little while now. Both Barclays and Lazard have similar programs. Barclays you stay as a 3rd year analyst but then jump to A2, leapfrogging a year on the path go VP. Lazard does 2 years A2A promote already but are still equally willing to let people recruit for the buyside, it isn't trying to plug a talent drain.
❤ Goldman.
I'm not really sure how this helps matters at all. If you now have direct promotes, you've just added a layer of associates and cost that you didn't have before. I'd suspect the top talent, who you are so concerned about losing, aren't going to suddenly say, "Yippee! Another 50 to 100k" since where they are going will probably be able to entice them with money or whatever it was that banking lacked which made them want to leave. I'll caveat this to say if this were executed correctly, and the idea was to take that top end talent and begin immediately developing them into sales roles that might be slightly different though I still wonder how many analysts are actually cut out for that. My guess is, a lot fewer, since I've noticed a lot my generation sucks at personal interaction which is paramount for success as you move up. Does this keep those people which are both technically and socially capable?
Isn't it kind of ironic that in year 1 and 2 everyone is fighting to be the top analyst in their class then when year 3 comes around and the new associates get promoted they are left with basically the guys who couldn't make it to the top of their analyst class. It just sounds like the deaf leading the blind situation.
Read this article yesterday. Honestly, I agree with the other posters who don't think it will change things that much. The tasks that will be automated are not the most important pieces of why people think banking is shitty. Even the pay at some point is glossed over.
What sucks is always being the client's bitch and how some senior bankers treat their analysts. Like somebody mentioned earlier, you have to start treating analysts like how Silicon Valley treats their junior employees - recognize that analysts have lives outside of work and treat them not as fodder but as assets you want to develop in the long run.
This won't be true for everyone, but I don't care at all about faster promotion to associate as I do not want to stay in banking past my analyst stint. The hours and unpredictability are deal breakers for me.
How long does it take for the other BB's to institute a similar policy? It seems like those brave few who know they are in banking for the long haul will be drawn to Goldman even more now
....
Any thoughts on how this affects the recruiting schedule for analysts? Seems like this makes it easier for analysts to switch to the buy side, compared to the prior policy
The buyside dream is overly simplified. To survive and make it 10+ years and launch your own fund is a pipedream and overly simplified in the OP / the boards.
I know GS was promoting several (select) analysts directly to associate after 2 years already so this seems pretty standard. I also don't think it really changes much because recruiting for PE happens 12-18 months before the analyst program ends and regardless, you'll never get GS or any bank to start promising promotions 6-12 months into an analyst's tenure.
What you will have is happier 3rd year analysts who are now making associate salaries. I think you'll keep a lot more third years / new "Associates". You'll have an issue with Associates making significantly more than analysts when they begin discussing salary for PE jobs. Believe it or not, most PE jobs don't pay $150k base. So now the Associate has to take a paycut to leave the bank or the buyside will strictly recruit A1/A2s as the salaries match up. As a result, I think you will actually have slightly better retention in banking. Also the idea of "seeing the light" a full year earlier makes a big difference mentally for banking. Associate work-life balance is slightly better than an analysts, although both are miserable.
Wrong GS will tell analysts in January of their first year, I.e 6 months in if they'll be promoted (they're hoping to give 50-75% of class promotions)
Good points
This is just purely for IBD right? Other areas won't change their hiring structures?
It won't change a thing when it comes to analysts wanting to jump ship to the buyside. The top PE and HF are not gonna be deterred because of a relatively minor change. I think the biggest impact it could have is on MBA as young associates who have gotten a taste of good money may be less tempted to apply to business school due to the opportunity cost. Already, banks and consulting firms and some PE shops are beginning to promote within rather than kicking them out for b-school. I think this trend will only accelerate as companies now realize that b-school is 2 years of fluff, with very little hard skills acquired during that time. Why kick out your promising analysts for a 2-year vacation when you can continue to train and mold them so they can add value to your firm?
As long as the Ibanks keep the same culture of worthless face time, no respect for anyone's time or life, it doesn't matter if it's Goldman or any other BB, they will lose top talent. People have figured out it just doesn't have to work that way.
The buyside is no cakewalk but ask anyone at top banks if they would take a spot at BX/highbridge/Apollo/Citadel or others and they will still likely say yes.
Having top buyside experience can also open many doors for many other interesting exit opps
Great writeup. Overall though, the analyst shift to the buyside trend really can't be beat. BBs (and banks in general) should just focus more on Associate level retention.
Great post, Patrick (as always). I think that this can be simplified into one reason, though. Goldman's policy will not work for one reason: the overwhelming majority of analysts at Goldman joined for no other reason than the exit ops. Most analysts at Goldman are only there so that they have a shot at KKR, TPG, etc.
Goldman was smart to get ahead of the Street in addressing the problem. I don't think it'll stop the leak to the buyside (maybe 5%, as was mentioned), but it will help Goldman attract top talent away from other banks. Probably a biproduct that they didn't intend, beneficial nonetheless.
This sounds like Goldman, and any firm that follows suit, will just have to counsel out more people before VP. Guaranteeing associate promotion does not guarantee cultivating the people/relationship skills required of senior bankers.
Goldman was already making direct A2A promotes after two years for smart analysts. This isn't groundbreaking, it's simply a standardization of a soft policy that previously existed.
While it won't impact buy-side recruiting too much (given how anyone who wants to be an investor, not a grunt at the bottom of a totem pole where shit flows downhill like the Human Centipede, will be looking to leave banking as promptly as possible), GS plans to extend A2A offers at the 6-month mark (January) to counteract how early the process goes off.
The real thing slipping past everyone's radar here is what the real motivation behind all these technology initiatives are. While they're in the earliest stages, the basic gist is that a tremendous amount of the mind-numbing work in PPT and Excel could be done by a smart machine (or 6th grader, but I digress). If you get those smart machines involved, all of a sudden you have happier employees who have more free time and an easier time at the office! Except what actually happens when technological innovation improves quality of life for employees? The employer simply gets rid of the unnecessary human labor component and enforces the same quality of life for the remaining employees.
Who knows, but we may see smaller analyst classes there in the future and the recruiting process is explicitly shaped to get people in the door for long careers there.
You might pooh-pooh it away, but think of how far ahead of the industry GS was with secdb ... what happens if the model-building and deck-making becomes heavily automated? You need way fewer analysts to do the actual analysis simply because the analysis is less time-consuming to perform. We're in that era now; existing technology (query-able machine learning systems that can easily perform all a banking analyst's tasks) is simply too expensive relative to paying an analyst $140,000 out of college. When that balance shifts, the human capital model in banking will be upended.
Separately, an interesting point is that moves like this (Goldman is always a leader on these initiatives and the other BBs follow suit within months) are likely to make more buy-side firms establish their own analyst programs. BX (on the principal side, not advisory) always had fantastic analyst programs. Silver Lake hired two (?) analysts a year from Wharton. Bain's had one for several years (decade-ish?). KKR and TPG are coming up on five years with theirs. CCMP is the only MM PE firm I know of to have an active campus recruiting effort for an analyst program. My guess is that we will see more of this.
You make some really vallid / interesting points, but the one I quoted above I feel like they have been saying this since I was an analyst in 2002. Are they really much closer to semi-automating the analysts tasks? Making them more efficient, hell yes, but to go semi or full automation is a huge huge leap ...one that I'd argue is decades away.
I think we'll continue to see technology help bankers become more efficient, but I'd argue any dent in the analyst class is much more susceptible to downturns in the economy...
The exact terminology as it specifically applies to "contained" machine learning (i.e. a system that teaches itself new things but operates within parameters you control) escapes my mind, but the broad term is recursive self-improvement. That refers to a machine coding upon itself in ever increasingly better ways; the leaps and bounds quickly create a hockey stick-style trajectory of improvement.
I have invested in (and passed on) several young tech companies working on problems like these.
If what we're discussing in 2015 vs. in 2002 is inches apart, what we'll be discussing in 2018 is yards apart from now, and 2020 vs. 2018 will be miles. That is the exponential growth trajectory for you.
We are only a matter of years from commercially deployable enterprise SaaS products that will allow an analyst to simply drag and drop three years of 10Qs into the software, let it churn for a minute before returning its first stab at constructing a DCF (while stating a percentage value for its confidence in the accuracy of its work [think of the variation in how companies refer to top-line revenue: "Gross Revenues," "Gross Sales," "Gross Turnover," etc.]), then click through a series of prompts where the system says "Hey, double-check these 17 points where I found an inconsistency" (i.e. it knows EBITDA Margin >100% needs to be reviewed).
Technology like this will be increasingly prevalent across all industries. The future of work is shaping up to be very different than the vast majority of people think.
Email me if you want to talk more about this offline.
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