Monday, June 18, 2007

Breaking down the "high" pay of a financial analyst

With stories coming from the Street about huge bonuses being paid at Goldman Sachs and other i-banks, there has been a flood of curiosity into why such high pays exist. Are finance professionals just taking their customers for a spin, charging much more than necessary?

Let's consider this from the viewpoint of an associate-level position at a typical i-bank.

This year, the typical i-banker is living in NYC, with a base salary of about $95K plus a $50K sign-on bonus and the possibility of a 50% annual bonus. Let's not consider that sign-on bonus, since much of that money is spent looking for an apartment, paying the security deposits and fees, and paying for the relocation costs.

$95K seems high, considering the median American individual income is about $32K. But let's break it down by hours.

At $32K a year, a typical workweek is no longer than 40 hours, with any extra hours almost unheard of, and definitely encouraged via overtime pay (time and a half). This works out to about 2000 hours a year, or $16 / hour.

Now, as an i-banking associate, a typical work week will be at least 60 hours, but more realistically about 70 hours a week, averaged over the year. This works out to about 3500 hours a year, or $27 / hour.

Now let's consider the original $16/hour median American. If he/she worked the extra 1500 hours a year, assuming time and a half on overtime, they would be making about $68K a year.

Still, there is about a $27K base salary difference and a potential 50% bonus (worth another $47K), totaling a $74K max difference.

But let's consider the tax differential. Let's assume both workers are single. At $68K a year, you owe $13,424 in federal income taxes. At $142K a year, you owe $33,871. This equates to an additional $20K owed by the i-banker, decreasing the after-tax difference to $54K.

So why is the i-banker worth an extra $54K a year?

They represent two types of scarcity: they hold an advanced degree and they have an innate intelligence that is rare; the laws of employment supply and demand dictate this premium to obtain such scarcities.

At the end of the day, I think the pay is worth it, because it is easy to find an average worker, and difficult to find an intelligent i-banker.

1 comment:

Michele said...

The pay IS high - no need to put quotes around it. I just graduated from college and I've come to a stark realization about the priorities of our country as I see friends who go into i-banking getting $60,000 plus bonus, while my friend who is becoming a teacher starts at $25,000 and a friend who's a social worker for the homeless gets $22,000 - and both of them have "innate intelligence".