Structuring my pay at a boutique - Should I take deal equity risk?
Would I prefer a higher base salary and lower bonus, or a low base salary and higher "deal equity"?
I'm currently interviewing for associate positions. I had a good interview with the founder of a boutique bank. He asked me to think about that question for when we next spoke
My instinctive reaction is the high base lower bonus given the turbulent times, but I'm wondering if I should take a gamble here. Obviously would depend on how low a base and how much deal equity would be, but here are my thoughts so far.
The bank has historically closed done well for a boutique, closing 2-3 deals per year, and according to the founder, it's pipeline is strong.
Several of the junior guys are the deal equity plan and have done well every year they've worked there.
You don't earn that big paper without taking risks.
I think the main thing holding me back is having gone through several years of shitty bonuses these past few years.
Thoughts?
TL/DR: What do you guys think about a higher base salary and lower bonus, or a low base salary and higher "deal equity"
Low base salary and higher "deal equity".
Keep in mind bonuses are taxed at a much higher rate.
that's only on pay day. at the end of the year, income is income, unless you're talking cap gains.
Example: base $70k, federal bracket 25%. You don't pay 25% on that whole $70k. In fact, you pay (10% of $8600) + (15% of $8601 - $34900) + (25% of $34901 - $70000). So, your effective rate is something significantly lower than 25%. State and local taxes are in addition to this.
Now, say you get a $50k bonus. It has 28% federal tax withheld - all the way through, i.e. not gradual like the above scenario. And then, the same state and local taxes as above. So it seems like (and is) a much bigger chunk held back.
At the end of the year, your total comp is $120k, and the total amount you owe the IRS (irrespective of what you've already paid via withholding) is the gradual approach, so all of the above, but (25% of $34901 - $84500) + (28% of $84501 - $120000). After all of your deductions, etc. if the amount withheld is more than what you owe, you get a refund. In this case, you'd get a pretty big refund because you had 28% withheld on $50k, which is a lot higher than your average effective rate (you can do the math).
If you're someone that makes so much money that the lower rates on the first, say, $200k don't help that much, i.e. say you make $2M a year - then like $1.8M of that being taxed at almost 40% federal, plus state and local, then 28% withholding on a bonus means you'll probably end up owing even more on that bonus at year end.
Thanks, I should've thought that one through.
Personally, I can't imagine answering the former to someone who owns a boutique. You're basically saying, I believe that projects I work on will pay me less than this arbitrary salary number.
If you require financial stability, say you'd like this for X months while you pay off your debts, and if possible, switch to this.
Not many get a chance to grab some equity, that's where the big $ are.
Good points guys. I've decided to push for the deal equity plan if I get through the interviews. Any thoughts about formulas to use in approaching this?
For example, let's say that typical associate comp is $100k base + $100k bonus. When reducing base to increase bonus upside, we know the relationship shouldn't be 1:1 because of the additional risk. I.e. If you reduce base pay to $90k, then potential bonus should be greater than $110K.
What multiplier would you target? 2:1? 3:1?
Ideally, bonus shouldn't be pegged to your salary at all. In any equity situation, base salary is simply a way to pay your monthly bills. The bonus should be where you make your killing, or not. It should depend on some known stake in the profitability of the firm. I don't know anything about what's common at a boutique bank though; you likely aren't going to have true equity, so who knows what arrangement they will be open to.
I doubt they'll ask you for specific numbers or multipliers. I think that your general attitude should be that you are strongly confident that the firm will perform well and would like as much of a chance to link your success to the firm's, providing that you can still live a comfortable life in the mean time. No member of management will hold that against you, you'll likely still make a decent wage, and they'll like that you are excited about the firm's prospects. If it gets down to numbers, I'd expect at least a 2:1 payout for every dollar base salary you lose.
It's all about tradeoffs...
A few questions you should be asking yourself - What's the fee stream going to look like regular basis? - Who holds the equity? - Do I want to stay at this firm for the long haul?
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