$100MM+ PnL - How to negotiate year-end comp
I’m looking for feedback from experienced HF professionals on how to manage my year-end comp discussion with my PM. This is my first year as a “senior analyst” running my own coverage, having spent the prior 2.5 years at this fund as a junior/supporting analyst after joining from PE. My coverage generated over $100MM of PnL for the fund with positive PnL from long book and shorts overall - on an absolute and risk-adjusted basis, my coverage outperformed the overall fund. I started the year with essentially no risk on, and my coverage has grown to be quite meaningful. It’s a $5-10BN AUM long-short multi-strategy fund, if it matters, and the firm is up low-to-mid teens YTD across the vehicles (one investment team, with multiple funds and a very broad mandate).
My PM asked me to think about what I’d like to get paid this year ahead of our comp discussion. My question is, how should I frame my total comp expectations and best prepare for this meeting? What is a fair “book-end” to argue for? Every employee at the firm is paid on a discretionary and non-formulaic basis (mostly cash, but some invested deferral).
Thanks all in advance.
$5-10m
if the pm is generous he'll get 3m tops, prob a chunk below that
analysts never get paid as much as they think they will/PMs will never attribute the full (or even majority) pnl to you
Most likely is $1m or double what he made last year.
Had a very similar situation and actually just left the firm after being so disappointed with how I was comp’d last year. (I wrote the SM promised land thread and shared my comp anecdotes in a comment there).
All I can say is don’t expect $5-10 haha. $2-3 if you’re lucky. I wrote about it in the thread and don’t want to go look for it, but think about what paying you $5-10 means: CIO asking himself “should I really pay this person 25-50% of the economics that accrue to the firm that are attributable to his coverage? Yeah, no. Let’s try 10%-20%. This is my firm not his. And how much of the $100 is alpha? Oh, 40%? Why should I pay him to pick a factor and ride the beta of said factor?”. You’ll probably be paid a L-MSD % of alpha PnL.
If you want to be more than fairly paid, you need formulaic pay + the best way to maximize that is go to MM. They’ll hire you after your $100m stat and give you much better economics. You (probably) wouldn’t be able to make $100m in the MM risk model as an SR analyst/JR PM, but I reckon a large piece of the $100M was alpha $s, where at a MM you’d be paid 7-12% of that as a JR PM / SR analyst (and can definitely generate sizeable alpha PnL on a large sleeve). This is the EXACT frustration point I had and one of the reasons I left…I feel for you.
What’s makes you confident that a significant part of the pnl was alpha?
alpha is very hard to come by. No idea what portion is alpha or beta but I wouldn’t bet on almost anyone that a significant portion of $100mm is alpha
I think he’s just throwing out numbers as an example, not to be precise to pinpoint an exact comp number.
I know plenty of people who were junior PMs under a senior PM in this exact same position in prior years on desks that made way more, and their bonuses were all south of $1m. If you’re the senior PM why give away more than you need, especially if you could be canned next year or the year afterwards for a short term slip up?
This comment is completely useless and doesn’t contribute at all… but damn.
Congrats man.
I generated $2 billion in comp for citadel this year. Read the book never split the difference
So what was your TC champ? Did you make sure to get Gregg Lemkau's take?
Pussy Galore was fired 7 months into his citadel job allegedly from people who have spoken to him from my school( he’s an alum from my school)
Great book
having been through discusssions where analysts were positively surprised by comp, satisfied and indifferent, you need to think about several things to set your own expectations (that may or may not impact your discussion):
1) Value above replacement - how much MORE p&l did you generate versus someone else they could have in the seat. I.e., how much better were you than the person they can replace you with if you leave?
2) related but different, how much was specific security selection? Like it or not, imagine you’re a tmt analyst and you went long a software company that was up 15% on the year. If all software was up 20%, then the relevant framework may not be the p&l generated bc you actually might have picked the “wrong” one (over-simplified obviously).
3) How much of the value was what you did vs the PM? This is probably the most obvious point of disagreement. “Covering a name” doesn’t create a causal line between your work and the pnl in that name. You need to able to point to discrete analysis you did that informed decisions or actually recommendations and decisions that drove p&l
4) How net long were you? Imagine if you ran 50% net long on $1bn GMV and the market is up 10% (made-up over-simplification). Then someone might argue something on the ballpark of $50mm of your pnl was beta (better ways to calculate that that this) and you may not get paid well or at all for beta.
5) How much capital and leverage did you use? Again an over simplification. But say you had a billion dolllars of gross on: Depending on the firm policy on financing and the mix of long vs short, you could be charged anywhere from about $6m to $50mm in financing.
6) Have you been paid reasonably in down years in the past or is that the firm model, even if this is early in your tenure?
7) Who takes netting risk? How did other sectors do? Generally you get paid less if someone else takes netting risk bc they have to account for that. If other teams did poorly and need to be kept, that can impact comp too.
8) the unfortunate and mostly irrelevant one but it will matter anyways is what you were paid last year. Most firms that are discretionary have a max in their head about how much comp can grow year/year. My experience was 2x roughly (comp could max double y/y). While that sounds arbitrary, think of it this way: if someone isn’t formulaic, to more than double their comp, then one of a few things must be true: a) their skill/ability more than doubled y/y - very unlikely, b) their comp last year underestimated their skill or c) comp this year over estimated their skill. PMs are smart risk takers - they will disregard A and say, if I really underestimated someone’s skill, let them show me again before I believe, so even if an is true, you end up in camp C.
Generally speaking my experience is that analysts haven’t always factored those variables into a discussion. They see high gross p&l and create expectstions they’re going to have a monster year.
happiness = (reality - expectations)
This is too true as somebody whos been in the same situation.
biggest obstacle will be the prior year comp point. Whats your prior year highest comp? If you never made more than say a $600-700k bonus than you may even get something as low as $1.5M. Agree with the above that given the massive outperformance $2M is a number that your PM may feel like you deserve and wont leave you angry/wanting to leave. $3M+ is an insane jump in comp and not many PM just 5x somebodys best year after 5 years with the firm.
Discretionary comp is always designed to give you less than you deserve, the reason they will not give you a percentage is so they can pay you less than that.
Would be great to hear from you how this shakes out in the end and any lessons you learned from your conversations.
HFPM nailed the process above but in reality the explanation is you will not be happy. No one who makes a post on WSO after what they consider their record year is going to be happy.
Reality is either the performance is not sustainable and resentment on all sides will form or it is repeatable and the firm/analyst have a process to remedy the situation (aka you do not need to post on WSO for advice). Might as well prep the HH calls right after you talk to your PM.
Given what you said you probably will be disappointed. Maybe in preparation try to read some self help. If there wasn’t an explicit deal, you unfortunately won’t get paid that much more. Your best move is to ask for a meaningful though not way outside of benchmark pay increase to your pay last year and then ask for an explicit deal that gives you a pnl cut the next year. I would use objective third party benchmarks adjusted for years of experience rather than what your friends say.
i disagree that you should talk to headhunters and immediately try to leave if you don’t get what you want. Probably other firms won’t really care or believe you. Or they will see it as luck. You can try but that’s the likely outcome. (I guess why would anyone believe you if the source of data is the same person who is going to screw you over here and therefore isn’t going to confirm your story?) like actually stop and think - say I talked to you on the phone and told you the same thing happened to me and I told you that you should hire me because I’m super skillful etc. would you believe me? My experience is the answer for most people is no after having something similar happen to me. I think my friends believe me but not sure even about that. It’s not really possible to observe investment skill even if you have all the data. But in your case I’m not sure if you really even can show objective data unless your boss cooperates which he wont.
when you say you’re leaving why are you going to say you’re leaving? Are you going to say it’s because you were treated unfairly? I don’t even know what you’d say in this context without coming across too negatively.
now realize that your boss knows the above is all true. He has done the game theory. Probably others have done it to him. So of course you will be disappointed. He who has the gold makes the rules.
The advantage of asking for an explicit formulaic cut the next year is that then your bosses greed plays to your advantage. Done right it can emphasize how much money you’re going to make him the next year. Maybe emphasize how you’d like to continue to make the firm money and be a part of the firm etc etc so you want upside so it’s more like a real partnership but where he’s still the boss.
I don’t understand why you don’t know what OP would say. You made PnL and you weren’t compensated fairly. That’s a pretty standard reason for people to leave.
“Think about what you want to get paid before the comp discussion”. Typically means we will have a 5 minute meeting. Will begin okay how you think you did this year? Then as said above bonus will be communicated as 2-3x last year. Any rebuttals will quickly be solved by the list of concerns also explained above. Then PM will cut the meeting short and back to work.
If the plan was to move to a formulaic process going forward there is not much to think about this year. PM would not let you even think about anything before hand, meeting would be them directly giving the “disappointing bonus” followed by okay next year this what we going to do.
As explained everyone knows this and wanting to leave based on confidence in your own ability is a good reason.
I hope for OP I am wrong.
This website is so short sighted imho. No one is ascribing value to being in a seat where you can put up $100mm years.
I wouldn’t leave right away. You want to be long term greedy. If you really believe in yourself, work on improving your comp situation in the current seat, put up big numbers and THEN trade to a big seat with a huge guarantee.
If you’re going to trade into a seat at a MM, build a strong personal balance sheet, get a big guarantee and go in as a PM. Because for 80% of ppl, it will be over at that firm in 1-3 years and then you’ll have to find a new job.
even if you’re being “underpaid” here, invest in your LT comp success. Keep learning, growing and succeeding bc it de-risks your future.
By far the most sensible comment on this thread, and maybe one of the best comments on HF comp and career development on this website.
100% agree with this. Many folks forget how hard it is to even get a shot at earning pnl.. As an example, I would suggest that you think about times you had ideas that didnt end up being implemented but would have made lots of money if they had been implemented. Having a good idea of what markets are going to do is only half the battle here, the other half is being in a seat that can make full use of that. Once you have a few examples of years with big numbers like this you can write your own ticket.
I would also add that you need to document your performance and the process behind it religiously (what was the trade, how did you develop the thesis, crtitcal assumptions you made and why, factors that would have made the trade go against you, etc). High performance will always be looked at with scepticism at first, especially if you are reltively junior/unknown so make sure you can clearly articulate why and how you succeeded.
Wish you the best of luck here OP; let us know how it works out for you.
Thank you all. I consolidated my thoughts into a few slides, both quantitative and qualitative, that I shared with the PM ahead of our comp discussion this afternoon. In furtherance of the collective knowledge of HF comp dynamics, I plan to update this thread thereafter.
Please do update! Very interested in the outcome.
Please do keep us posted.
The posts from the HF person above hits it correctly. Long-term greedy is where to be at. Keep your seat, keep performing, and after a few years you can make the lotto winnings.
It depends on how long is your non-compete. If your non-compete is short ( 3 months or 6 months ) you can threaten to leave and bring your investment strategies to a competing fund, and use it as the leverage of getting a stellar bonus that is more than 3M. If you have a super long non-compete and it’s in written format, then they probably will pay you less … because you are locked into the fund by non-compete and you can’t leave anyways.
The above is for quant fund tho, not sure if it’s the same for fundamental fund
That doesn’t always work though. It will work for one year but then they’ll look to create redundancy which will squeeze your comp longer term. Yes, they know this in their head that turnover is always a risk but it’s a delicate balance between pushing for more and not making them truly believe you’re going to leave.
100M on 5-10B is 1-2% return. how is it good when Treasuries pay 5% and SPY makes 25%?
if 5-10B is total fund AUM, then what was yours? i.e. what % return did you make?
Lol what is this comment, you think there is a chance he controls the entire $10B himself?
why did he mention it and not the amount he controls
please never apply to a HF thx
This is their gains after fees. Long shorts have to fund their trades by borrowing capital. If they didn’t have to pay borrowing fees their profits would be a much higher percentage.
Besides, many long shorts have a mandate to stay market neutral and remain uncorrelated with directional market movements (ie you’re expected to win on years the market goes up and down).
Thank you. Is there an expected size of borrowed capital at each moment?
What happened?
bump
What happened here?
Dude what the fuck is your book size, no clue how meaningful $100mm is and the hurdle $ amount
*UPDATE* I took a lot of the advice contributed here, so thank you all to those who helped with advice. My PM blocked off time in a conference room and I walked through my prepared thoughts. I started the conversation with "you could zero me and I probably won't leave" followed by "I really like it here, being on this team, believe in the process, etc" and had tangible points for why. Then we walked through my performance quantitatively, discussed winners, losers, and learning opportunities, etc. I said I thought I deserved $4MM but recognized that would be a significant investment in someone with my years of experience so we discussed how to create alignment. Ultimately we settled on $4MM total of which $2MM was paid upfront, with the $2MM balance invested in the fee-free employee sidecar and vesting over the next two years of employment. Ultimately I think it was a "fair" outcome for both sides and I'm pretty happy overall.
Holy shit congrats. My only advice after your first big year, go buy something nice you would never normally allow yourself to (Car, Watch, etc). Every time you look at it you will think of this year and accomplishment.
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