Why do banks over hire?
I’m very uninformed about this topic and would love to hear your answers. I always feel like during good market times banks tend to go on a hiring rampage. Afterwards when markets go poorly, there are mass layoffs/RIF’s. Wouldn’t it be better to not over hire all the time and just find a happy median? I think banks can save money from hiring costs and whatnot if they didn’t over hire just because your deal flow is picking up when it will inevitably just fall again. Why not just keep your analysts and MD’s take a lower bonus? It just seems like a never ending cycle of over hire, fire, over hire, fire, over hire, fire… Again sorry if this is stupid but I’m very uninformed.
Because banks aren't run by smart people. Especially BBs and Balance Sheet MMs. EBs from what I've seen tend to not have this issue.
A Group Head can be gung ho in a bull market and go hire everyone because he's feeling it. If market goes poor, just fire those analysts. It's not like the Group Head is losing his job anyway, so why should he even think that carefully?
I’m just spitballing here but there’s probably enough deal flow to warrant hiring more analysts and when the deals dry up they (ideally) axe the worst performers.
You will be surprised how afraid senior bankers are about firing DEI Becky. They want to avoid unnecessary probing by HR at all costs.
Can confirm. DEIs never get laid off. Rich white Becky's = privileged and impossible to get fired. Most firings are Asian and Indian dudes anyway. Sometimes white too, if he's not a nepo baby.
They genuinely need the extra hands when deal flow is booming, but since its banking and employees are expendable, they’ll just fire the bottom performers when the time comes.
Has to do with two things:
1. There’s an expectation at most banks that a majority of analysts will leave after their second year (most have two year analyst programs). So even if they may not need the analysts after a year, the returns on cranking out as many deals as possible stumps any employment headache that may be a concern.
2. Investment banks are structured in such a way where management isn’t looking forward when hiring new analysts — they only care about the now. There’s this belief that banks can never do well in a contractionary period, yet this is a critical period to obtain/preserve market share as this is when the random foreign banks come out of hiding to poach top MDs.
But banks aren’t so much dumb, they just view overhiring as the better option to underhiring since since it’s easier to fire a person than it is to hire and train a new employee.
Agreed. Much better to overhire juniors to keep seniors happy and deal execution flowing and deal with the negative press from RIF’s down the road.
If you keep things too lean incumbents, including top performers, are going to get frustrated and become high risk for attrition.
when you under hire you lose tens of millions in fees from lost deals, when you over hire you lose a couple million in analyst base salaries
They do it because they can and it pays well enough that there is an endless supply of students who want to do investment banking. The boutique I joined way overhired during the hot market in 2021 and as soon as rates started to come up had to cut a lot of us. Sometimes you get unlucky c’est la vie.
I think it’s because when they layoff people they tend to start at the top. Then they are left with the cheaper salaries to pay. Something like that I guess
Used to be that way but no longer holds true. A&A have been laid off in recent turns while VP+ unscathed …
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