Over the summer Morgan Stanley, Goldman Sachs, JP Morgan, and Bank of America have announced that they will be giving junior bankers — think: analysts and associates under the age of 30 — a pay raise of about 20% to 25%.
According to The Wall Street Journal, Citigroup is considering the move, too.
There are two simple reasons for this.
First, the industry is facing tougher competition for talent from forces both within and outside of Wall Street, and second because of a little thing we like to call “banker burn.”
Post-financial crisis regulation has changed the way big banks do business. Riskier, lucrative sources of revenue like proprietary trading are on the outs thanks to the Volcker Rule, for example, and compensation has been cut.
Without the fat paycheck, Wall Street isn’t as attractive as it used to be overall. As an industry, it is facing competition from the startup world and tech giants like Google and Facebook that can also afford to pay employees quite handsomely.
Within finance, more often than not, if a super-talented employee does start out at a big bank, he or she is ready for more intense action and bigger money at a private equity firm or hedge fund after about four years.
Private equity, for its part, has started poaching that talent earlier and earlier as it grows as an industry. Private equity firms now make up 32% of investment banking fees — $US6.5 billion out of $US20.4 billion in total banking fees, according to Dealogic.
And PE firms tend to pay their young employees far more than banks do, and more of those bonuses are in cash — not stock, as they often are at big banks.
That brings us to our second reason for this pay bump — banker burn.
Horror stories of overwork during a young banker’s career abound on Wall Street, where the idea of “paying your dues” is sacrosanct.
Some of these stories end up as humorous anecdotes; others are beyond serious.
A lot of this talk about improving young bankers’ work-life balance started after a 21 year-old Bank of America intern named Moritz Erhardt died after suffering an epileptic seizure in London. An investigation found that it was brought on by the long hours and stress he was under at work.
This is the kind of stuff that makes the most talented youngsters entering the job pool wonder if Wall Street is really worth it. It’s no wonder big banks feel as if they need to sweeten the deal.
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