Reasons for MDs to Lateral?

Hey all, spent my SA at an EB group that since the end of summer has poached a handful of MDs, which got me thinking, what's general the rationale for MDs to lateral? I figured that MDs at most places would generally be compensated based on fees generated, with certain places a bit more "eat what you kill", and any solid MD would probably need a pretty large guaranteed comp package higher than his compensation in order to move banks to justify the hassle and the need to "ramp up" at his new employer, but also how does the new employer justify the comp package when it probably has to be a sizable premium to the MD's compensation (which I figure is a proxy for his past fees generated and a decent assumption of his ability to generate future fees)? Furthermore, how can firms judge MDs based on their past performance (given how opaque fees generated are, doubt they'd contact the MD's current firm about that) to make sure they're not poaching a dud?

Also, at the MD level, does firm "prestige" matter anymore for lateraling, or is it almost completely based on the MD's comp incentives (eg. does it make sense for a good MD to lateral from Barclays to MS)?

Comments (22)

  • Intern in IB - Cov
1mo 

Rainmaking MD left my bank as they changed the fee structure that MDs get. 

Also know an MD who is group head at a lower BB. He could probably move to a more "prestigious" BB, but he would likely not be given the same title just yet as he's relatively young. 

  • Intern in IB - Cov
1mo 

Following, also curious. Interned at an EB that poached a lot of seniors throughout 2022, and was wondering what the motivation is for MDs to move, especially between EBs e.g. Lazard to Evercore

1mo 
guyfromct, what's your opinion? Comment below:

Common reasons are:

Feel a different platform can be more supportive. If you're a senior banker and you don't have good corporate banking/lending and that's important to clients that may be enough impetus to move. It can also be that the bank has relegated your coverage area to a backwater and doesn't provide what you need to succeed.

Pay structure doesn't work well for them. Some MDs feel they're getting screwed and want better economics.

Politics/fit. Self-explanatory

Guarantees. Some firms will want to poach or get a group off the ground and will make an offer that's irresistible 

  • Intern in IB - Cov
1mo 

Got it, thanks for the response. Something that confused me was the guarantees aspect, as it would seem like guaranteed comp would have to be greater than the MD's NPV/fee-generating potential, which would make the individual MD a negative investment for the firm poaching the MD, but it makes a lot more sense seeing it as a firm's investment in jump-starting a new practice/franchise

Also, your first two points make a lot of sense for moves across different types of firms, but it seems like the points are a lot less important for certain jumps like EB -> EB, where I'd imagine the platforms are much more similar in that they emphasize the MD's advisory abilities and relationships and the compensation structures are mostly "eat what you kill." Any insights to what drives those types of moves?

  • 1
1mo 
guyfromct, what's your opinion? Comment below:

Got it, thanks for the response. Something that confused me was the guarantees aspect, as it would seem like guaranteed comp would have to be greater than the MD's NPV/fee-generating potential, which would make the individual MD a negative investment for the firm poaching the MD, but it makes a lot more sense seeing it as a firm's investment in jump-starting a new practice/franchise

Also, your first two points make a lot of sense for moves across different types of firms, but it seems like the points are a lot less important for certain jumps like EB -> EB, where I'd imagine the platforms are much more similar in that they emphasize the MD's advisory abilities and relationships and the compensation structures are mostly "eat what you kill." Any insights to what drives those types of moves?

It's not necessarily negative NPV to offer a guarantee, presumably any hire is a positive NPV, just maybe not on day one. Also the quoted 1-3MM in compensation for an MD is substantially less than their fee generation, the rest covers direct (junior bankers) and indirect overhead (compliance, marketing, IT, etc.) and return to shareholders. You can have lower returns to shareholders over the period of the guarantee, if you expect it adds value over the long haul.

When moving between comparable firms politics and personalities come to the fore. Maybe the firm you're at has shitty culture, you don't like the direction leadership is headed. I'd imagine since some are private and some are public there are meaningful differences  in comp e.g. restricted stock versus cash and potentially outlook, quarterly versus long term. The platforms are in some ways more different as the size of EBs varies fairly dramatically and some do have more full service platforms than others.

1mo 
high hopes, what's your opinion? Comment below:

There's 4 primary reasons

(1) Guarantees - happens more often right before a down market like 2022

(2) Economics - MD Comp is still a black box at BBs and can get blown up by S&T or big fines at banks - EBs give a set % to their MDs on fees generated 

(3) Platform / Commitment from Firm - some banks are more eager about lending / focusing on certain industries - banks are moving away from oil lending and beefing up renewables right now. Same applies to LBO financing, etc. 

(4) Positioning for Group Head, etc. 

  • Intern in IB - Cov
1mo 

Thanks for the insight. Just a couple more questions -

(1) How do firms screen who they are interested in poaching? I'd imagine MD performance and the strength of their coverage relationships are pretty opaque, and it wouldn't be too difficult for an a strong MD to position himself as a rainmaker, an average MD to position himself as an above-average MD, or an MD that hasn't been hitting fee targets to position himself as an average MD, for the sake of getting higher guaranteed compensation.

(2) Are group heads generally the rainmakers? At my EB the group head was the rainmaker and apparently also had better economics on his compensation, but at most other EBs/BBs are group heads generally the rainmakers or are they just the good administrators?

  • 3
  • Intern in IB - Cov
1mo 

That brings up another question - how does client coverage work for newly minted MDs. I'd imagine that especially for BBs/EBs that have minimum fee targets, there's only so many clients that are worth covering, and obviously the more senior/established MDs are probably less likely to give away their most lucrative clients to a new MD. Do new MDs generally have to search for new, smaller clients, or are established MDs "altruistic" enough to hand off their less favored clients?

  • 1
  • Associate 3 in IB-M&A
1mo 

Yep lots of new MDs are out there scouting private clients who might want to do some M&A or IPO. once had a new MD trying to convince everyone that a subsector in a different coverage group should actually be covered by our group, and tried to meet with/poach their clients from another group in our own bank - not a good idea. but yeah, new MDs have to get creative.

also a very large/acquisitive/heavy lift client a senior BSD MD is sometimes "generous" enough to have 2 MDs cover them and junior MD can do the regular meetings and "touch base" pitch work BSD might not have time for, but BSD closes the big M&A

1mo 
[email protected], what's your opinion? Comment below:

On your point about whether they might be a dud or not. Had one leave our firm for another smaller firm who seemingly did nothing at ours. I thought he got fired or something when he left but nope. I asked one of the VPs and he said the guy probably knew he was on his way out here and got the job by blowing smoke

1mo 
ke18sb, what's your opinion? Comment below:

To add to what has been said already, some banks can have better franchises in certain industries. Contrary to what people may believe, its often the bank that sells the deal not the MD - even for great MDs. So, you can be a great MD at BB/EB  X though BB/EB Y has a better long standing position in the sector you cover thus you're job would become even easier by lateralling if the opportunity presented itself. 

Its not prestige in the sense that people on WSO think about it in terms of recruiting, etc. But for some coverage there is hierarchy within the client base that is not entirely MD driven. Often times MDs are merely plug and play into long standing franchises - and I don't say that to take away from them because it was a hard slog to make MD. 

Most Helpful
  • Managing Director in IB-M&A
1mo 

When I last lateraled, which was at the MD level, I did it because a) I was at a firm with a substantial balance sheet / financing capability but I never needed the balance sheet and was running an advisory only business (so I was being taxed in my comp for something I didn't want or use), b) the path for further advancement ran through some less capable but internally politically well connected people, and I calculated that this was a fight I was more likely to lose even if I had the better economic case and c) while I was and am NY based, I wanted to control the global business which was politically impossible.

I had three options: a) a globalhead role at a strong MM firm with an established team, but one I would have need to turn around; b) a partner role at a top publicly traded independent advisory firm; c) group head role at a MM firm with no history in the space. I chose the latter because the established MM firm was going to be too much time dealing with internal politics and the independent advisory firm didn't have the model to scale up the way I wanted in my sector, where's the company I joined was ready to make the right investment in scale. It was definitely the riskiest move but I wanted to build something. 
 

it was very difficult at first - when you make a "down" move brand wise, you learn who your real clients are. i had to take on a lot of LMM business to prove ourselves and I had to fight for every dollar to get the hires I wanted and my people paid. Worked out very well financially and strategically in the end once we showed we could deliver and we're here to stay, and we constitently started doing the deals that matter

  • Intern in IB - Cov
1mo 

Sage Kelly is that you?

Jokes aside. This is really helpful to see how a MD thinks about his optionalities.

1mo 
techiebanker, what's your opinion? Comment below:

Do you mentor people via wso? Would love to connect live if possible!

1mo 
PetFro, what's your opinion? Comment below:

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