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Welcome to MBA Podcaster the only broadcast source for cutting-edge information and advice on the MBA application process. I’m Catherine Girardeau. On today’s show, a topic of great interest in any economy: salaries for MBA grads, specifically those in the traditionally highly paid sectors of finance. It’s a given that the finance industry is not the easiest place to find a job at the moment. For this story, we’re investigating what kinds of salaries those few MBA grads lucky enough to land a job in investment banking or private equity can command. How is the recession affecting MBA grads’ salaries in these areas?

Since early 2009, investment banking salaries and bonuses have been threatened by the TARP (Troubled Assets Relief Program). But career advisers are generally telling people that TARP doesn’t affect every firm. Many investment banks will keep paying bonuses. The word on the street is, “For those who wait out, times will improve.”

Let’s get some background. Starting salaries for MBA grads and first year associate investment banking positions after bonuses range from $80,000 to $150,000 a year according to careersinfinance.com. The site says the bonus part of that typically is 10% to 50% of salary moving from 1 to 3 times salary overtime. Career experts are forecasting salary ranges over the next two-year period to trend up for those first year associate jobs ranging from $150,000 to $250,000 with a typical all-in compensation to be $170,000. As for current figures, careersinfinance.com said that in 2008 a first year associate at a boutique firm brought in $120,000 base salary with a $70,000 bonus making their all-in compensation $190,000. Across the investment banking sector, all-in salaries plus bonuses are down about 40% to 80% from their 2007 peak. Bulge firm salaries tend to run 20% to 40% higher than boutiques and regional firms, said careersinfinance.com. Though, be aware that there are exceptions to that rule. Let’s talk first to our experts about private equity.

I started with Brian Korb, a partner at Glocap Search. Glocap Search is a recruiting firm focused mainly on alternative assets. Korb heads up Glocap’s private equity practice. Glocap recently published The 2009 Private Equity Compensation Report which provides data on base salaries and bonuses paid to professionals at later stage private equity firms, early stage venture capital firms, and private equity funds. Because Glocap Search is a recruiting firm, it gathers its compensation information from current offers going out not just on historical data. It gathers salary information from companies who use its services as well as candidates on what they’re offered, are making now or are projecting to make in the future.

So where is compensation going? Until this year, according to Korb, it had been a very hot market, but once the market’s growth slowed down compensations growth slowed too. So compensation growth in private equity, anyway, is flat. “Funds asked themselves really a couple of questions: do we cut comp for everybody because we can or because things are quieter? Do we get rid of people then keep compensation strong for certain people, or do we keep a lot of people but then show a larger discrepancy in bonuses, or how we pay people: the top performers versus the medium performers? So on the aggregate, comp on the private equity side appears flat. What’s newer to the equation is the degree of variance between really strong performers and people that are doing well but having sort of out performed.”

But compensation hasn’t necessarily shrunk either. Mareza Larizadeh is the Founder of Doostang, a website that connects ambitious young professionals with jobs. Larizadeh detailed offers going out for first year associate positions in private equity. “It really depends on the fund size, how much assets they have under management, and the size of the team. Basically, you’d expect a base of let’s say $150,000 to $200,000 with a bonus of probably $200,000.”

Brian Korb, partner at Glocap Search, detailed the mechanisms that are keeping salaries flat. “Each year of experience would usually come with it some sort of predictable bump and those bumps have gotten smaller.”

The other thing happening is salaries are increasing more slowly, Korb said. Your salary trajectory might take longer to climb. “They’re still open to having the larger jumps when you get a title promotion, but within your same title there is definitely less advancement from a year-to-year basis. Contrary to what you may think, Korb said, salaries don’t necessarily vary by region of the country. “What drives compensation is the type of caliber/pedigree of candidate you’re going after and what you can afford to pay. So if you’re a multibillion dollar fund in New York, and you want the best candidate with top pedigree from the top school in the top investment banks, and a top performer and all that, you’re going to pay a high, high premium. However, if you are a multibillion dollar fund and in you are in a small market and you want that same top person, with the same caliber and pedigree and everything else, then you’re going to pay practically the same, if not the same, to get that person.” So how does an MBA grad land a job in private equity in this economy?

Korb said that his clients have always strongly preferred, if not required, a candidate to have a private equity experience before business school. But Korb advises this year’s MBA grads, even those who have that previous experience, that getting that job is not going to be easy. “There’s a lot of people, even with experience, who aren’t able to break in. Don’t rest on the fact that you’ve done private equity. Still be out of the box, still be trying to differentiate yourself, still try to add value, still offer to do some project work where you can get tested out and show that you think like a strong investor. So that might be the difference in the advice. I used to say “Oh, if you already have private equity experience, you’re going to get plenty of interviews and land somewhere.” And I think our messaging has changed saying “Hey, there a lot of smart people who didn’t really get opportunities.” So looking back, it wouldn’t be in their interest to differentiate themselves further.”

We asked Vault.com Finance Editor, Derek Loosvelt, how he would advise soon-to-be MBAs on their job search. “Banks are still hiring. Right now the M&A market is increasing. So it’s a good time for both those areas. Nothing is different from in the past in terms of getting a summer internship. If you want to go down the investment banking route it is probably going to be even more important than it has in the past. But I think it’s even more important now and I just wouldn’t lose hope. I think there are offers to be had and then I think it’s not going to get worse. But the one thing that might happen, which I’ve heard from some folks, it all depends how market goes, folks may be more conservative in their hiring because there are so many people out there that they could pick up some lateral hires. So it’s possible that MBA hiring will get even more competitive in the next year or two because there’s so many lateral folks out there that were laid off in the big rounds.”

Successful candidates will have to be able to prove in concrete terms that they can add value to a fund. Bryan Korb, “Generally, you get a higher compensation in private equity if you can perform and be a great investor and create value or add value to an organization.” I asked Korb how much his client’s value where a candidate has earned their MBA. “I think the bigger premium has been put on the network you developed at school. If you go to a top five or ten school – I think some firms at the very senior ranks know that overtime you will be to harvest and harness that network. But you have to show that that’s what you got out of it. So it’s not just like “Hey, you have this degree and therefore you command a higher salary because all that instantly means you’re going to add value and the vice-versa. And if you don’t have this degree that doesn’t immediately mean or you won’t add as much value. Someone can be naturally networked and already a three dimensional thinker not need to be an MBA, and could add all that value. For other people that’s where they sort of fill in the gaps at business school. Ultimately it’s a merit based business so you have to be good in adding value, and if you’re good, that’s going to drive your compensation more than anything else.”

In case you have what it takes to actually lend a private equity job, you still need to clearly assess you career goals. Korb said, “I think within private equity if someone is deciding between—sometimes a large fund that pays a lot versus a medium size fund that pays less that’s when there would be a little bit more of risk return trade off. You can go to a larger fund and get paid a lot of cash sooner, but then the risk can be, well – how long will it take you to be a very senior person at this firm? Your trajectory could be a lot longer. Your learning experience could be watered down a little bit. As opposed, if you go to a medium-sized firm, people choose to take less comp and to go medium-sized firms all the time saying, hey, but this has the better promotional track, and I’m going to take on more responsibility. So people definitely have their own kind of risk return profile that make them not always take the higher cash offer.”

Vault.com Finance Editor, Derek Loosevelt, mentioned some of the firms currently hiring MBA grads. “Even in areas such as investment banking — which have had highly publicized layoffs – those firms still, they’re taking folks from undergrad and MBA institutions. Perhaps not in the same number as they have in the past, but they are still hiring. They did take people in the MBA class of 2009 for full-time positions, lower than they had previous years but still a significant amount of numbers. Product companies seem to be hiring decent amounts. Like General Mills, Kraft, Procter & Gamble, Intel and then some companies like Exon, Conoco Phillips and Chevron. We heard from more top tier MBA schools that those companies were definitely still hiring. And then the financial institutions, definitely all the big ones, were still hiring this year from JP Morgan to Goldman, Wells Fargo, those types of firms.

Has the summer internship picture changed for MBA grads? Are summer interns still being paid? Derek Loosevelt, “This year definitely, they’re still hired for interns. But it was in fewer numbers than they did for last year. Companies are looking already towards next year. That decision to hire summer interns will be May, it could be end of this year and full-time hiring decisions are going to be made pretty soon. So if you’re talking about MBA level, yeah, you’re definitely getting paid. It’s usually similar on a pro-rata basis as to what you’ve been making when you get out of school if you are full-time at that company. Even if firms are hiring fewer summer interns, so this year for example, a few financial institutions like Goldman Sachs or JP Morgan,, you may have hired the same amount or maybe even fewer summer interns, but depending on how the market goes by the time you want to decide who’s going to receive those full-time offers, and then I expect, you can see a higher percentage of summer interns getting full-time offers in this year’s class because there are fewer of them hired. So your answer is yes, they’re definitely getting offers.

We’ll turn now to Investment Banking. I called up Payscale, a company which collects salary data from people through online pay comparison tools. According to Payscale’s data, over the last two years, investment banking analyst salaries have dropped 1%, while bonuses have dropped over 60%. Investment banking associate salaries are down 11% over two years ago, Payscale said, and bonuses are down 64%. That brings investment banking associate median salaries down to $97,700 a year. Here’s some current data from Doostang’s clients on compensation in investment banking. “Generally, you’re looking at a base salary of $100,000 and a bonus which should probably be 80% to 100% of that and it’s the bonus that’s really come down from a couple of years ago. I think the base salary has more or less stayed consistent, whereas before people who were looking at bonuses perhaps 200% of base. Loosevelt laid out the kinds of salaries investment banking firms are offering. “Salaries are $95,000 to $100,000. These are first year folks coming right out of MBA school, and it’s about the same thing with bonuses usually about $95,000 salary plus bonus.”

Brian Korb, partner at Glocap Search, said what’s changed overall is the variance in compensation for the top performers versus the good and mid-level performers. Top performers, quite simply, can still get the high salaries and even bonuses. But bonuses are flat or shrinking for less than stellar job performances at a fund or firm. “If someone is really an out-performer, they want to still take care of that person, they really want to protect against that person leaving. And banks usually give out buckets of bonuses; i.e. tiers. There is the top 10% tier and there is like maybe the next 25% and the next 50% tier or something like that. And the top tier, they’ve been more protective of that group, it has supposedly has changed less. But that middle tier and lower tier has been cut anywhere I think around 25% to 50%. And what the banks are thinking more about is what to do with the base salaries and that has to do with TARP restrictions and the fact that bonuses can’t be as high going forward so at some banks they’re thinking to raise base comp.”

I also wanted to get the long view on compensation in investment banking and private equity for MBA grads. BusinessWeek recently asked Payscale to dig into its database of 80,000 graduates of 45 top MBA programs and calculate their median cash compensation, salaries and bonuses, during the first five years of their careers and after. BusinessWeek then used that data to calculate an estimate of median cash earnings over a 20-year span. Al Lee is Payscale’s Director of Quantitative Analysis, he said even he was surprised by some of the compensation data. “For the highest rank schools that often do put a lot of people into the consulting and investment banking sector, we actually saw a drop in pay between one or two years out and then five years out in the median pay which you think, wait how can people’s pay actually go down? But what’s fascinating in our data set is we of course don’t just track the people who report back to the school or anything like that, we’d look at everybody who comes to our site and what we actually saw was this kind of change: a lot of people got very excited, go to Wall Street, get that very high, six-figure job and then from there, realize maybe the work isn’t for them, and five years out go on to a path that’s maybe a little more rational in terms of work-life balance, and actually take a pay cut. That was the most prestigious school, the school that tended to get recruited heavily by consulting and investment banking firms.”

I asked Lee to help me assess the current salary picture for MBA grads going into high powered and typically highly paid positions. His conclusion squared with Glocap Search’s results. “Even in a large downturn with lots of lay-offs, generally the pay total cash compensation for the whole year for people who are employed actually doesn’t really go down much. Now, some of the crazier aspects of huge starting bonuses and that kind of thing might filter out. What’s fascinating to me is that, if you go in, look at the kind of total cash comp once you get past the kind of starting bonus effect, for almost every job, the pay has not actually gone down. Now what has happened is the trend that some of the people aren’t getting those jobs. So the number of openings may be substantially lower but of the people who actually take jobs, and basically graduates from MBAs into these areas as well, they may not see the big crazy starting bonus. But in terms of the basic pay, maybe off a couple of percent from last year, but you won’t be seeing that suddenly the kind of three or four-year income stream will be down 20% or 30% in these areas.”

Lee said that even though there are fewer positions available, companies don’t want to sell themselves short by scrimping on their offers. “Companies, generally speaking, when retreating in the number of people they hire, hiring fewer people, generally don’t like the lower salaries because they don’t want the cheap person. They want the best person they can get at a particular price. So they had a budget and hire somebody for $100,000, they’re not going to say, well heck there’s somebody out there, let’s only get somebody we can get for $70,000 because if you’re only going to have one person, you’d rather have the high quality person, or if you’re only going to recruit a class of new MBAs at a larger company and you’re going to have 30% less than you had last year, well you don’t want to bet on taking the cheapest person you can get because they’re probably not going to be the right answer for three, four, five years down the road as the company bounces back. Generally speaking, things could fall completely apart, but if this goes in the course of kind of typical recessions, and lay-offs, and cut-backs and so forth, a lot of jobs won’t be available. But of the jobs that are available, they’ll pay roughly what they paid in previous years, but the difference is the quality of the applicants that will be getting those positions, they won’t need to go down as far down the list to fill the positions, so the top person always would have gotten the job. Now, they’ll be getting the same job, roughly the same pay, minus the starting bonus but the difference is there won’t be quite as many people who would be able to get into that field.”

Lee said there is a connection between salary levels and which MBA program you graduate from. Though, it’s not necessarily that you were being compensated for the pedigree you bring. It’s just that if you get your degree from a program with strong connections to Wall Street, you’re more likely to get one of the now scarcer, higher paid jobs. “People from the working school, one or two years out of their MBA program, average in the neighborhood of $145,000 a year which is totally serious money, and that was driven largely by the fact that that’s an example of the kind of pay that was happening last year and a year before. But this data was collected through mostly 2008, so the numbers hadn’t really softened at all relative to previous experience, but weren’t actually the very strong connections to Wall Street. In fact, the top three programs that are by pay—starting pay, Pennsylvania Wharton School, Harvard and Tuck School at Dartmouth—all have that kind of very strong connection, and the median pay of $135,000 or more two years in is pretty reflective of the kind of salaries that people, for total cash compensation, base salary, plus bonus, plus any profit sharing and so forth, cash compensation were getting at those schools.

But Lee said, despite the recession, people who don’t go to those Wall Street connected schools, who managed to get into the field will be paid similarly to what they would have if they graduated a year or two earlier. “There are hundreds of thousands of people who get MBAs from a vast variety of different schools, and typically you start out, you have to learn and your value to the company is much smaller than you could, you know that kind of numbers they get thrown around. And so, what I would say is pretty much, despite the concerns about tapping the economy for anyone who is finishing the MBA program, and is looking at their career for the next five years, there are sort of two things that are going to happen, either the economy is going to turn around, or we’re going to go into a great depression for a decade. So if we don’t have the latter, it doesn’t really matter. The main effect they’ll see is it will be harder to get if they’re a marginal student or somebody who had been up on the bubble for getting hired into one of these premiere programs, they may find their path to a high-paying Wall Street career, may have to pass through a regional bank or something like that. The number of positions available will be down. However, basically the pay is not with the exception of perhaps starting bonuses, the pay that people will see will be—I can pretty much state definitely—as long as the field exists, the pay will be comparable to what we’ve seen in the last year or two for starting positions, first year, fifth year, that kind of range. It will not be the people suddenly take a tremendous pay cut in these fields.”

Mareza Larizadeh, founder of Doostang, offered some perspective on the current job market in finance. “The job pool has shrunk, but obviously if you’re an MBA from the leading school and you put some effort into your job search, yeah, I still believe even in 2009 you can find, maybe it’s not exactly what you’re looking for, but something similar to what you’re looking. So for example, if you want to work for a big private equity firm, some of them may not be hiring or hiring less, but you can definitely put yourself somewhere in mid-market private equity. From what we’ve seen over the past few months, things are definitely picking up a little bit. The good news is that these private equity firms have a lot of money sitting on the sideline. It’s the most money they’ve had in history. Now, the question is whether their LPs will actually give them their money because a lot of the LPs are hurting. I think just sit tight: if you already have a job, it’s great. Leverage will come back, it’s not going to go back like it was two or three years ago, but there will be more leverage. The credit markets will ease and there will be the opportunity to actually make private equity investments and with that, people will need more talent and the hiring will pick up.

Vault.com Finance Editor, Derek Loosevelt, “I would say in three years, it’s going to be probably pretty similar to what happened before the lay-off.s Not this year, I don’t think anyone is going to get too excited and start [hiring] even if the market comes back for it. They’re going to be a little conservative, if anything does hiccup in the market, no one is gong to want to slash people again. I think it was just very brutal, what banks went through and morale has been just killed at so many of these big firms and also, product companies too and other industries. So I think people are going to be pretty conservative for the next year and even two years, but I think at the three year mark I think people are going to say, okay let’s just wrap up. So that’s a guess, it could be who knows next year.”

For more information, a transcript of this show, or to register for your bi-weekly MBA Podcast, visit mbapodcaster.com. Look for us on Twitter and Facebook to get the latest news and insight in the world of business school, or join us on our forum hosted by Beat the GMAT to discuss the show and ask questions of our guests, www.beatthegmat.com/mbapodcaster. Thanks to MBA Podcaster’s Janet Nakano for help with this story. This is MBA Podcaster. I’m Catherine Girardeau. Thanks for listening and be sure to tune in next time when we explore another topic of interest in your quest for an MBA.

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