Why is Wall Street Raising Salaries?

Nathalie Olds

Why is Wall Street Raising Salaries?

Firms up and down Wall Street have recently been announcing plans to increase salaries for their junior bankers. While current and soon to be junior bankers are likely walking with an added bounce in their step, you may be wondering why Wall Street has suddenly become so generous. Does trickle down economics actually work? Were Wall Street execs visited by the Ghosts of Christmas Past, Present, and Future? Why are junior bankers suddenly on the receiving end of significant increases to their base salary?

Before jumping into the “why,” let’s first establish the “what.” Goldman Sachs, JP Morgan Chase, Citigroup, Bank of American, and Morgan Stanley “have decided to raise pay or are seriously considering the move for many junior bankers,” according to the Wall Street Journal. These raises increase base salary on the order of 20 to 25 percent. Benefits tied to base salary will therefore increase as well, though benefits have not been called out specifically. As for bonuses, which have earned a somewhat infamous reputation in the financial sector in the last few years, it’s less clear whether any changes will be made. At Morgan Stanley, for instance, the current thinking is that the salary increase “won’t affect bonuses, which are determined separately around year-end and could fall even as salaries move higher,” states the Wall Street Journal. In addition to changes in compensation, banks are increasingly looking to make changes that improve work-life balance.

The “what” is therefore a rather long list of changes to compensation and working conditions. In order to determine the “why”, as in “why are all of these changes being made?,” I’d like to use a trick I learned at my last job. The trick consists of asking the following question: “What are we solving for?” Presumably there’s a reason behind this sudden and widespread salary increase – not to mention the other changes.

To my mind, there are two reasons.

1) Attracting and retaining junior bankers has become more challenging.

2) There’s a perception – and arguably a reality – that excessive risk taking is plaguing the financial industry.

The Challenge of Attracting and Retaining Talent

According to the Wall Street Journal, “recruiting has suffered from the reputational damage of the financial crisis, the long hours of working at an investment bank, and a challenging revenue environment for the industry.” Will raising salaries help solve this attraction problem?

Compensation certainly has an impact on attraction and retention. For starters, compensation needs to be competitive as compared to the available alternatives current and potential junior bankers have, including private equity firms, hedge funds, and the tech sector. The aforementioned “challenging revenue environment” led investment banks to defer a number of bonuses. Given that bonuses in the industry are fairly large – especially as compared to base salary – younger employees were faced with cash flow problems, according to Bloomberg. Combine those cash flow problems with more lucrative offers from outside the industry and investment banks are facing a serious attraction and retention problem. Increasing base salaries brings investment banking compensation in line with the compensation offered by competitors and it solves (at least partially) the cash flow problem.

Compensation, however, is not the only factor that matters in attracting and retaining talent. Employees want to feel valued and they want opportunities to grow. Professional development opportunities are a great way to help retain your employees, and it sounds like Wall Street is listening. Morgan Stanley, for instance, has “hosted internal conferences focused on career development,” according to Bloomberg.

If Wall Street is serious about finding and keeping great people, however, it’s going to require a serious culture shift. There’s talk of junior bankers working fewer hours, introducing ‘protected weekends’ that prevent employees from working Friday night through Monday morning, and introducing time-management guidelines. Along those lines, they may also want to require younger employees to take their full allotment of vacation; I spoke with an investment banker a few years ago who told me that first and second year employees at his firm received two weeks of vacation time but that first years rarely used any of their time and second years took maybe one week. They were expected to work 80 to 100 hour work weeks and took 0 vacation for at least one year. Is it any wonder attraction and retention (and burnout!) are an issue?

Having a culture where you’re expected to be at work – regardless of whether there’s anything for you to do – is also detrimental. One of the ways to ensure junior employees aren’t overworked or clocking in too many hours at the office is to ensure that their managers work relatively normal hours. The idea is that if your manager sends you email from 6 am through 11 pm (or worse – 2 am), you’ll be inclined to do the work then and you’ll soon find you’re working all the time. Sure, you can do some expectations management around not needing to reply or do the work right away, but this is a case where actions speak louder than words. Your manager may *say* that it’s okay to wait until the next day, but they’re working right now – why aren’t you?

Addressing Excessive Risk Taking

A real culture shift will lead to a change in Wall Street’s reputation and should, along with increased base salaries, significantly improve attraction and retention. To fully repair Wall Street’s reputation, however, a response is needed to the perceived (and often real) excessive risk taking their bankers engage in.

From the Wall Street Journal: “Politicians and regulators argued the industry’s pay policies pushed employees from the CEO on down to take risks that left the financial markets on the brink of collapse. Big banks responded by moving to lower year end cash bonuses, while paying a bigger slice in company stock and boosting salaries, viewed as a more stabilizing means of pay.”

In terms of compensation design, the banks’ response is sensible. Compensation design is all about generating the behaviours you want your employees to demonstrate. Unfortunately, as base pay and benefits don’t motivate task behaviour (completing your assigned tasks), organizations often turn to performance pay to motivate employees to get things done. Providing larger and larger performance bonuses often encourages people to take larger and larger risks. If you’d rather they refrain from taking huge risks, then upping their guaranteed pay and reducing their short term performance based bonuses is the way to go.

How, then, if bonuses are reduced (or even removed), is task behaviour generated? People aren’t motivated solely by money. There are many theories of motivation that try to explain what motivates people to get their work done. They might do the work because it’s interesting, or because they like the feeling of completing a project, or because they’ll receive praise from their boss. Many of these reasons are detached from compensation; managers to need find out what their employees’ needs are (interesting work, public praise, etc.) and ensure these needs are being met. In addition, appropriate control processes (such as properly enforcing protocols that define how and when to take different levels of risk, or setting upper limits on how much bankers at each hierarchical level can invest without seeking direct managerial approval) greatly influence task behaviour.

Will These Changes Be Effective?

Let’s circle back: do the recent salary increases solve any problems on Wall Street? On their own, increased base salaries are nice for junior bankers to have, but they’re unlikely to have a significant impact on either attraction and retention or on task behaviour associated with excessive risk taking. However, introduced in concert with relatively lower bonuses and significant changes to working conditions, increased base salaries will help solve these problems. Crucially, cultural changes to working conditions must be seen as well as heard. Words on their own won’t do much good because employees will see right through words if actions don’t back them up.

Are you interested in compensation issues? I’ve written dozens of articles on compensation, motivation, retention, and more over on my compensation and rewards blog CompThoughts. Come take a look!