2nd Year Analyst Bonus
Hi all,
I was wondering what incentive do IBs have to pay 2nd year analysts their annual bonuses who leave for private equity? For example, if I communicate to my team a year before my second year ended that I was leaving after my two years for another opportunity, or even for personal reasons, what incentive would they have to then pay me a bonus after I leave? I'm trying to understand as a great deal of firms follow this protocol where analysts aren't even employed when they receive a bonus after their 2nd year. Thank you!
Legally, nothing. If you under-perform or reneg on your contract or whatever, they likely will give you zero.
If you successfully complete your 2 year stint, it's true that reputable banks will pay a full bonus, though probably not as much as if you accept a 3rd year or A2A. The main incentive here is that, well, people talk. WSO is a great example of this and banking is a pretty small world actually.
If word gets around that a bank stiffs their departing 2nd years, there's really no incentive for anyone who's planning to leave to stay a moment later than when the 1st year bonus hits the bank. Given that's the majority of analysts, this would create perpetual annual turnover, and it's hard to overstate how much better a 2nd year is than a 1st year analyst, especially in the fall/winter when the 1st years are new.
Paying out 2nd year bonuses is a cheap insurance policy to ensure teams aren't stuck with a shitty class of fresh 1st year analysts. Assuming ~$75k each, that's at least 10 analysts for one (low end) MD bonus.
Also, by the end of two years you generally know your MDs well. There's probably an MD going to bat for you, who likes you as a person and wouldn't want to screw you over to save pennies.
As a bank, consistently burning analysts that are leaving for PE is a great way to get PE firms to dislike you (because those analysts are going to those PE firms and many will stay there long term...). Not really something investment banks want to do
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