Starting pay for new investment banking hires at the analyst (entry) level has gone up recently. This report shows that the investment banking employment cartel is now paying £45,000 for people starting this autumn in London. That looks like good news for the dwindling number of bright undergraduates going into these jobs. But the increasing premium over law, accounting and other related jobs reflects two bad things about investment banking.
First, the social stigma of working in an investment bank is putting off so many well qualified applicants that the employers need to pay a premium. Call it the antisocial reputation premium. It is apparently embarrassing to have to admit in polite company that you’re working for an investment bank.
Secondly, and this is more anecdotal, the increasing hours in investment banking are driving people away. Never a job for those who want an active social life, the hours have become absurd. One of last year’s MFin students secured an Associate role at a major investment bank after doing a summer internship that regularly kept her past midnight, including saturdays. Emails at 3am or 4am apologising for not replying earlier suggest a completely pathological working environment. Call this the antisocial hours premium.
And while this might just make sense as a test of commitment, a process of sorting out those with the stamina and commitment to work long term in investment banking, it seems that it’s actually a permanent state of affairs. I interviewed an MFin applicant from another bulge bracket investment bank who wanted to do the degree because he had observed not just Associates above him working every weekend and evening, but even VPs. There was a time when the VP got to work a bit less hard as a reward for sticking it out for six years or so. If you now need to make MD before life get’s easier then it’s not surprising that there is a very high drop out rate among analysts during the first few years of joining the banks.
I personally would never have considered working in the long hours culture of advisory/M&A, so I’m a bit puzzled why anybody would put up with it, even for the money. The markets side of investment banking is hardly easy but offers slightly less crazy hours (but very early starts) and I believe a more meritocractic promotion system.
The differential meritocracy is all about asymmetric information. In advisory/M&A the analysts are indistinguishable drones in their early years. There is little that the employer can do to tell who is best so they measure that which is observable – working hours. In what is a relative contest, everyone strives to work the longest hours, consistent with not actually collapsing from fatigue or killing your colleagues in a burst of narcoleptic madness. The equilibrium outcome is that everyone works very long hours indeed. And since in this context personal patronage is critical to getting ahead, so analysts suck up to their superiors in the hope of preferment. This is also easily imitable so everyone does it, nobody gets much ahead and the seniors treat the juniors with disdain.
In markets jobs, each team is different and relatively small, there is more individual information on which to assess performance so good people, whether in research, trading or sales, have a better chance of being rewarded, promoted and given access to clients.
In the longer term, the survivors in M&A have greater potential to make higher pay. So those who stay the course get a financial reward, as well as starting to actually have an interesting job and work with some very bright clients. So the decision as to which branch of investment banking to join is a mixture of:
i) what’s your discount rate?
ii) can you bear to give up your social life and pride for a few years?
Thankfully there is a lot more to working in finance than joining an investment bank.