What an awful time to be getting into S&T

http://business.timesonline.co.uk/tol/b ... 176083.ece

I wonder if other banks will follow suit?

That's interesting, however compensation for banking is fundamentally different than compensation for S&T. In banking, the firm collects fees. There's some incentive to maybe get a deal done to collect the fees, but the banker doesn't really have the power to force people to make a deal. S&T is different though. Traders make money based on returns from their trading, and they are paid big bonuses for making big returns. The problem, of course, is that you can't make big returns without big risk. So, under the old compensation system, traders were incentivized for taking huge risks. If their work is judged over a period of years though, the incentive for taking huge risk is reduced.

Still, I think banking compensation is in for a huge change. There's no reason for them to claw back bonuses paid out in good years (unlike with traders), but there's also a lot less incentive for banks to pay big bonuses to bankers these days. Work is slow, fees are small and there's not much competition for talent. We'll see how things shake out in the years to come.

You're right, after some thought, I think that the new S&T compensation model that UBS is proposing is probably the right one. It forces people to think about the long-term implications of their trades and holdings, and not only the short-term. There is no such thing as a quick buck or a free lunch. We just can't have our world's largest financial institutions being run like hedge funds anymore.

I think IBD compensation will continue to be based on market factors and fees. Both of which should be unfavorable over the next few years. I've heard that associates got a $30K bonus back in 2002 and most were just happy to keep their job.

Correct me if I am wrong, but the investment banking divisions of these large banks are not really the ones to blame for the financial crisis? It's the reckless traders and the top bank executives who allowed it to happen.

I just had a conversation yesterday with a good friend headed to JP Morgan. He said that he'd be really mad if he worked all year (like a dog in his words) and got paid just the minimum guaranteed bonus (about $35-40k). He'd rather know up-front so he could decide to go do something else. I had essentially the same conversation with a full-time associate at the firm I was with over the summer. Certainly, nobody wants to see their job evaporate, but working all year with little to no bonus (and there's a school of thought that associates work harder when there are no deals) would be terrible.

I agree with the idea that the Investment Banking divisions are largely not to blame for the financial crisis. When firms were looking to re-trench over the summer, they all looked to their IBDs as core businesses with no downside risk (just collecting fees). Got memos from the CEO during the summer saying just that. Now, the IBDs did do the LBOs with private equity firms that got levered up to insane levels, and the paper from those deals got stuck on their balance sheets. However, I'd say those things were early indicators of frozen credit markets rather than a cause.

You know, call me overly optimistic or jaded as I don't have student loans, family commitments, or anything of that nature to deal with yet - but I would just go ahead and work at JPMorgan even with the crappy bonus. Yes, the money is great in banking in the boom years, but I think the real reason that most people enter banking is for the skillset. If you want to go into private equity down the line, JPMorgan IBD is an excellent place to hang out for a couple of years before the markets pick back up. If you join JPMorgan today, you would work dog hours and make about the same as your consultant or general management friends, but what about 3-4 years from now when things pick up? Your consultant/GM friends will be clearing $200K if they're really lucky. You'll either be a VP at JPMorgan or a VP at a private equity fund and making a multiple of that.

I understand one hole in my logic - deal flow is going to be light. I'm not sure how valuable of an experience it would be to just sit around pitching non-stop and I don't know if PE firms would value this experience much.

Oh, and another assumption in my logic - compensation levels will return to normal in 3-4 years and our whole industry won't be completely turned upside down. Who really knows, I guess.

Pelihu -- Why is everyone switching to consulting? What is their logic and their long-term plan? I know that you've been looking at consulting opportunities pretty closely, as well. Are a lot of people just assuming that this go-go era of Wall Street (1980-2008) is over and things will never be the same again? I suppose that an exit to private equity or venture capital is also a very realistic exit opportunity out of consulting if you work on the right projects and really want it?

And one last question if you don't mind - let's say that a particular group within an investment bank is actually doing well in this climate (maybe restructuring?) and actually executing deals and collecting fees. Will the associates and VPs in this group get paid decent bonuses? Or will they be shafted due to the overall firm's poor performance.



This makes perfect sense - thank you for the insight.

I think the challenge to the logic is that a lot of people don't plan on spending their entire careers in banking. Certainly, if you see yourself as a banker 10 years down the road, then entering right now is probably a good idea. But a lot of people go into banking thinking that it is a great opportunity to work your ass off for 2-3 years, make a lot of money to pay down debt and gain experience and a resume bump that will allow for transition into something else. If these people aren't going to get paid big bucks for those 2-3 years to pay down their loans, it really doesn't make sense to go into banking for just that period of time. There's also the thought that banking could be fundamentally changed, that the current crisis is so broad and large that fundamental changes (either internally or through regulation) will prevent banks from paying out traditionally huge compensation for years or decades to come.

Some people are switching to consulting, though recruiting is really tough right now in all fields. It's tough to switch into consulting in short order because preparing for case interviews is pretty time consuming. I think people are looking at opportunities to try to position themselves over the next 2-3 years. Believe it or not, people running hedge funds and private equity firms (we just had our investing conference last week and I talked to a bunch of people) are not optimistic that their businesses will be big money machines in the future. PE firms believe that the industry is very mature already, and that making money through purely financial engineering may be going away. Hedge funds are facing their on realities regarding how they make money, and all are dreading tax code changes with the new administration coming in. Value investing is all the rage again these days, and personally I wouldn't commit the next 2-3 years of my career positioning myself to get into private equity or a hedge fund. Things just don't look that great these days.

Regarding investment bank compensation, the single biggest factor (associate and VP levels) is how the firm does as a whole. Everyone made big piles of money the past few years because firms were hauling in money at a record pace. At higher levels, SVPs and MDs can negotiate employment contracts where their compensation is guaranteed or tied to the business that they generate themselves. For associates, the best news is that the firm is having a great year overall.

There plan is to simply make money, with little or no interest in how they achieve it. It is one of the most demoralizing things I have seen at Business School. A good number of people have no real care, passion or interest in what they are going to do in the future save for recognition, and $.

In the whole above excusing IBD from this situation, while true, their direct fee-based life will probably come to an end due to its short-term viewpoint. Especially where they are working on debt issuance, as they can be seen to simply sell the trading floor down the river by not exercising due diligence. It is a tricky formula to assess.

This was my impression. Very sad, but I guess people have to pay the bills somehow. In a good economy, an MBA degree provides you the freedom to pursue your dreams. In a bad economy, it seems to pretty much hinder you with the amount of debt that you've piled up, along with a certain expectation of income level.

The "goals essays" are truly a joke. I have a nauseous feeling that half of my classmates will be bought by the highest bidder.

Well, I don't really agree with those sentiments. In fact, it's a little strange to me for people to have such well defined goals in their lives that they've got 5 or 10 or 20 years planned out. I think a lot of people are simply interested in a good job and good career. This could encompass a lot of different things, but the common factors are money, location, work environment, benefits, career advancement opportunities, cachet for future job searches, and maybe a dozen other things. Job function is just one of the many factors to consider. In fact, I think it's perfectly legitimate if someone goes to business looking for something like, "a professional environment that allows for the building valuable experience and opens up a lot of future opportunities". This could describe banking, consulting, general management or a variety of different functions. Sure, for some people job function is the most important thing, but people locked-in in such a way is about a narrow as someone who focuses exclusively on location or pay.

Some things have varying importance to different people. One of the summer analysts at the firm I was with over the summer had piled up about $120k in debt by the end of her third year. Figure $160k by the time she graduates from college and another $150k for business school and pay would have to be a major factor in any career decision. Other folks have equally important concerns regarding location, family & hours; while still others will choose jobs that goose their careers in the short run or give them the most options in the longer run. I'd say that a lot of people wouldn't necessarily care about job function if they can get a "good job" whatever their personal needs and desires are.

And let's not forget that there has been unprecedented tumult in the economy in the past year. An industry or job that looked good last year isn't necessarily all that attractive these days; and not only have the jobs changed but the demands of the economy have changed as well. If you're entering a booming economy, it might make sense to enter a profession paying out-sized compensation. If you're entering an uncertain economy, it might make more sense to enter a profession that allows you to develop skills and offers greater flexibility to attack whatever opportunities emerge when the economy turns around 2-3 years (hopefully). To some, that makes more sense than targeting a specific industry or function only to find out when you're ready for a promotion down the road that the business has changed or no longer exists.