50% Lower Compensation-- Would You Still Work in IB?

That is one idea proposed in a recent NYT article about the lagging performance of banks, specifically in regards to their ROE.

Obviously, the idea of cutting compensation at Goldman Sachs by 43 percent will not be popular among the people who work at Goldman Sachs. But it still would mean they get paid more for working at Goldman than they could doing anything else without putting their own capital at risk.

Investment bankers by their very nature are the most risk-averse people on the planet. Where else can you work and get paid huge salaries without risking your own capital? My bet is the compensation on Wall Street can be cut in half and most of the people who work there will stay put.

Okay, so compensation wouldn't be cut in half exactly, but 43% is still one hell of a haircut. The author doesn't really go into detail about his proposal, but does anyone think that is the direction banks could/should be headed? Would you want to keep working IB hours after your pay is cut in half?

Comments (44)

Feb 27, 2016

1) Who is going to institute this pay cut? Certainly not senior executives or management, or senior bankers. These small groups of individuals stand to lose the most money. Also, it won't be some outside public or regulatory institution because that's obviously not how things work. The most that can be done to impact bottom lines already has been -- namely, increasing regulatory / compliance requirements.

2) The beauty of the compensation structure on wall street is that bonuses are discretionary, so lowering compensation by 50% is effectively cutting, or eliminating entirely, one's discretionary bonuses. Obviously this has happened before in severe down markets or when banks take huge fines or have terrible years. Wiping out your bonus is certainly not something that bankers take in stride, but in down times you can still sleep soundly at night knowing that you are getting a base salary that you can live off of, and perhaps next year would be more profitable. If you are suggesting reducing total comp by 50% by cutting bases or doing away with bonuses long-term, that's obviously not sustainable for reason #3.

3) Inevitably, pay cuts would be a terrible move industry-wide. Comp cuts would trigger a fragmentation of the investment bank market and create various tiers of comp at different shops, where the best banks would no longer compete for talent on the basis of prestige (GS/MS/JPM) but on the basis of money. There would no longer be "market comp" at any level. It would be terrible for the industry because a lot of talent would probably get reshuffled and consolidated to the "highest bidders" where bankers would effectively become consultants. In this case the overall quality of the IB work product would suffer and the best talent would be even more highly concentrated than it is now, effectively creating a banking monopoly at the top of the pyramid. This is not sustainable because so much money is at stake for so many bulge bracket banks -- ironically cutting costs would not be a cost effective way to increase profit, because you're risking losing much more from lost clients.

All of the above is pure speculation.

    • 4
Feb 27, 2016

lol I don't think people realize the ridiculous margin of advisory businesses

Feb 28, 2016

As an analyst... fuck no.

    • 1
Feb 28, 2016

At the lower levels, if you cut compensation by half, you would make more or the same amount of money working in a lot of F500s. Even at higher levels it's not that different from a higher level exec at big tech/big pharma/big oil. Then take into account things like consulting and you'd no longer be able to attract the same talent due to the massive lifestyle differences.

There is almost certainly an amount you can further slide down the compensation curve and attract great talent. But banks have already started losing the absolute best. With another big cut and now you are looking at losing those just below the top too.

The advisory side is still extremely profitable and has a very good long term outlook, but it certainly isn't true across business areas at BB banks. And it certainly feels like the EBs of the world may be the better investment for those that are considering a career in banking, even if this particular 50% cut is a non starter.

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Feb 28, 2016

Lol fuck no.

Feb 28, 2016

Not a snowballs chance in hell.

Feb 28, 2016

Do you really think this will happen? No way

Feb 28, 2016

Guys, what about 'doing God's work'?

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Feb 28, 2016
DickFuld:

Guys, what about 'doing God's work'?

http://www.nerdunion.us/wp-content/uploads/2015/11...

Mar 4, 2016
DickFuld:

Guys, what about 'doing God's work'?

Even the Lord takes his 10% commission on Sundays.

Feb 28, 2016

Typical NYT columnist doesn't understand how compensation is determined in a competitive, market environment. It's not about what some pontificating pundit believes a job is "worth;" it's about how much companies are willing to pay to draw talent away from their competitors in order to secure an advantage (i.e., alpha or supernormal profit). It's about the incremental earnings that institutions earn, above and beyond the cost of labor, that is considered when determining employment wage rates.

Though IB compensation (in fact, almost all of finance comp) will decline over the coming years because the value-add is declining. Much of it was also the result of government-stimulated, bubble conditions but that's another matter.

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Feb 28, 2016

If you looked up the columnist you would have realized that he was actually a M&A banker for 17 years, including at Lazard, Merrill, and being MD at J.P. Morgan.

To answer OP's question though...fuck yes I would. I honestly am not trying to go into the Analyst gig for the money anyway - if that's the end goal then compared to what I could be making 10-20 years into my career, analyst pay is nothing. Besides, I think there is so much more value that getting a BB/EB Investment Banking Analyst position on your resume can bring, that I think it is worth it even with half the monetary rewards.

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Feb 28, 2016

Assuming if you are able to get into strategy consulting, you could potentially work less, earn more, and have similar value in career progression though

Feb 28, 2016

This won't happen and I highly doubt most of the people in banking would stick around if this were a long term situation.

Feb 28, 2016

The margins in advisory are massive and it's not because of the "market" as some people are saying. Banks simply don't compete on fees in M&A and RX. It's a (probably) unspoken collusion and might get stressed if GS decided they want to boost ROE.

    • 1
Mar 1, 2016

Where do you come off saying that? First off, people do compete on fees. Not necessarily on the headline smashing jumbo M&A but trust me, fee compression happens and people compete on fees. Some of the banks have turend away business because minimum fee wasn't reached.

Second, the margin on an individual advisory assignment is high but overall, maintaining a large fixed cost base to advise is not cheap, and its even more expensive for a full service investment bank

the best margins are in Asset Management

Mar 3, 2016
DebunkingMyths:

Some of the banks have turend away business because minimum fee wasn't reached

A lot of times that is because they aren't reaching the required return (non-advisory related).

Feb 28, 2016

Sure! For a 43% decrease in hours (holding all other benefits of an IB career equal) I'd be happy to.

Feb 29, 2016

So, at the end of the day, this will happen or no?

Feb 29, 2016

No.

Feb 29, 2016

What I'd find interesting is a breakdown of total comp expenses by level. What % of a BB's salary expenses are paid out at the MD level, versus ED, VP, Ass, Anal, etc? What about if I split them by function - IB, ops, compliance, HR, etc.? How about if I split IB further into ECM, DCM, IBD, etc?

Best Response
Feb 29, 2016
Angus Macgyver:

What I'd find interesting is a breakdown of total comp expenses by level. What % of a BB's salary expenses are paid out at the MD level, versus ED, VP, Ass, Anal, etc? What about if I split them by function - IB, ops, compliance, HR, etc.? How about if I split IB further into ECM, DCM, IBD, etc?

Ass, Anal level?

If you don't know who the sucker is at the table, it's you.

    • 8
Feb 29, 2016

Anus Macgyver has a point - I assume that at the upper levels, a 43% or other sizable cut would lead to a lot of senior bankers taking their talents elsewhere, the caveat being that they would still be making a figure that is livable. For analysts, the quality of life to compensation just would not make sense anymore; trying to live and work at a fast pace is usually not cheap, from personal experience. If one could earn relatively the same amount but have to input less time, the decision is pretty clear.

Mar 1, 2016
Angus Macgyver:

Ass, Anal

your head is in the gutter mayne

Mar 1, 2016

There are 2 two ways to cut compensation. Fire 43% of the people, or cut 43% of the comp or do something in between.

I suspect something in between will happen. IE total comp will decrease. Head count will decrease so the best performer will still get paid. You're right bankers are risk averse but there are few bankers who are amazing at their jobs but can't find other competitive work that pays them.

If you cut comp across the board, the best people will leave and you're left with the duds

Mar 1, 2016

What does the trillion dollar + hedge fund industry do exactly? They're paid to take risks with other peoples money. The fact of the matter is they play by a different set of rules (leverage, etc) and his barometer is the equity prices of these banks. If every hedge fund were listed entities, I'd be interested to see how they trade. (There are a few listed examples)

Also bank stocks are all down 25-30% in the last couple of months so again, their share prices are not great indicators. If these firms were allowed to cut reg cap and lever more aggressively, their ROE would be way better (duh) - he even acknowledges this

it's a bit of an unfair comparison I'd say

Mar 6, 2016

Significantly cutting compensation of investment bankers would be pennywise and pound foolish. That would be the dumbest move by any bank. This is the kind of business strategy advice that could only come from the New York Times.

Wall Street investment banks have exactly ONE commodity to provide--extraordinary human capital. Not investing in the human capital is the single dumbest thing that a bank could do. It would be like Apple cutting the wages of its product designers; it would be an utterly asinine move. If you want to cut costs there are a TON of ways to cut costs that don't involve knee-capping your sole commodity.

Because people on this board are generally highly intelligent and generally went to elite colleges, they don't realize how atypical really high intellectual horsepower is. The kinds of things that investment banks, hedge funds, private equity firms, etc. do on (and off of) Wall Street generally takes pretty high intellectual horsepower, and I would say the wealth/income statistics of the last 40 years generally bear out the fact that these guys have been VERY successful at making clients money. Simply put, Wall Street WILL continue to pay up for top talent because it's extremely lucrative.

Mar 7, 2016

I take issue with the following part of your statement: "these guys have been VERY successful at making clients money". No, they haven't. Over the past 6-7 years hedge funds have as an industry have delivered no value above an S&P index. The reasons people still invest in them are manifold (they're chasing the next Renaissance, they need to justify their asset allocation paycheck), but it's not because the industry delivers enormous value for its clients. As for investment bankers, it's even worse. There's an overwhelming amount of research out there that shows that the vast majority of M&A is value-destroying and most companies are better off reinvesting their funds internally or paying them out as dividends. Again, there are many reasons that CEOs continue to do M&A (I would put ego as reason no.1), but it's not because M&A bankers continue to deliver great deals.

Mar 7, 2016

Somehow in the last 30 or 40 years, the wealthy have gotten much wealthier relative to the middle class (and that's pretty much accelerated in the last 6 or 7 years). Obviously, somebody on Wall Street knows how to make people a LOT of money. So long as that continues to be the case, highly intelligent analysts, associates, etc. will continue to be well compensated.

Mar 7, 2016
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