Financial discrimination as a management/business strategy
There was a thread around WSO mentioning how an IB analyst, despite getting a six figures comp, still had their parents supporting her with $200k per year. This made me think about the difference between kids that come from wealthy families and those that not and are in IB; then an idea popped into my mind about a business/management strategy, let's call it efficient financial discrimination.
The idea is that the full IB analyst class (100% of it) should be made by only 1 type of people between those 2, and never a combination of. The 2 types of people:
1. From a wealthy background. Idea: Banks pay them peanuts. Those kids don't need the money and they remain with the bank only to leave on the buy-side after 2 years (they're parents already can support them financially without any issue, so again, no problems). They don't need the money, so they're not for the money. In other words, they're motivation in the job is sustained by non-monetary reasons.
2. Non-wealthy background. Idea: You pay them current market comp. They come from modest financial backgrounds so an IB comp is significant. You can buy their loyalty and dedication to the job to a certain degree with this compensation, and they're fine with that, they don't really care about it as long as they're paid properly.
Because my issue is why I would want to have an IB class where hypothetically 80% of the analysts fit point 1 and the bank pays a six figure compensation (cost for the bank) that the bank could perfectly keep it; that's like throwing money away. At best I give them a salary 5% above what Big 4 pays, for what makes them remain in the job are the exit opportunities, not the compensation.
The ones that truly benefit from the current comp are the others 20%, so I'm using 80% of my cost allocated for salaries in an irrational manner. Thus my thesis is that I would homogenize the IB analyst so 100% of the class either fits point 1 and we reduce costs or the class fits point 2 and we increase loyalty and attachment to the company, because the middle point is the most irrational one.
Obviously, this is controversial, especially for the woke, but business-wise there are no flaws. The only potential issue is other banks raising comp to attract other candidates, but that's a 0 sum game because now banks pay all the analysts mostly the same and they're still in the same spot. Also, a higher comp for analyst wouldn't make your bank better. Because the key point here is that only analysts receive this treatment, from AS above you get the comp this currently given, and seniors are the ones that dictate how well your bank does.
Interesting perspective you've got there! It's a bit of a hot potato, but let's peel it back layer by layer.
Wealthy Background: You're right that some analysts from wealthy backgrounds might not be as motivated by the compensation as their peers. However, it's important to remember that not all wealthy kids are the same. Some might be motivated by the desire to prove themselves, others might be passionate about finance, and some might indeed be in it for the prestige or the exit opportunities. Paying them less might demotivate them or make them feel undervalued, which could impact their performance.
Non-Wealthy Background: Paying these analysts market compensation is indeed a way to buy their loyalty and dedication. However, it's also a way to reward their hard work and talent. These analysts often have to work harder to break into the industry, and the high compensation is a recognition of their efforts.
The idea of homogenizing the analyst class based on their financial background is intriguing, but it might not be as efficient or fair as it seems. It could lead to resentment among the analysts, and it could also discourage talented individuals from less privileged backgrounds from pursuing a career in investment banking.
Moreover, it's important to remember that diversity - including socioeconomic diversity - is a strength in any organization. Different backgrounds bring different perspectives, which can lead to more innovative solutions and better decision-making.
Lastly, while it's true that senior bankers play a big role in a bank's success, analysts are the ones doing a lot of the heavy lifting. They're the ones pulling all-nighters to get pitch books and models ready, and their hard work and dedication should be rewarded accordingly.
So, while your idea is certainly thought-provoking, it might be more beneficial to focus on creating a supportive, inclusive, and rewarding environment for all analysts, regardless of their financial background.
Sources: Investment Banking is the only place where discrimination still truly exists, Does Investment Banking Make America Less Efficient?
bullshit
wtf are you on man…
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