The chances are that if you’ve made it into an investment bank, you’re competitive by nature. Not only is the recruitment process highly selective and rigorous, but only 20% of candidates who get in eventually make the cut to carve out a career. It’s important to make a positive impression early.
However, this could be a mistake – at least from an employer’s point of view. Encouraging a ‘star’ culture in investment banking is one of the fastest ways for companies to erode their reputation with clients, suggests an academic study released last year by Zhaohui Chen and William Wilheim of the University of Virginia and Alan Morrison of Oxford’s Saïd Business School, and junior bankers are more guilty than most in trying to distinguish themselves from their peers without thinking through the consquences.
Some of the more recent blow-ups – Fabrice ‘Fab’ Tourre and the Goldman Sachs Abacus deal, Kweku Adoboli at UBS and Jérôme Kerviel at SocGen – have been precocious young traders being given a lot of responsibility early on. Technological advances on the trading floor have made it easy for talented young traders to take on a big book, but this doesn’t always work out well for the banks’ clients. Matthew Taylor, the 28-year-old Goldman trader sentenced to nine months in prison for wire fraud after fabricating trades to hide an $8.3bn unauthorised position, said he did so “for the purpose of augmenting my reputation at Goldman and increasing my performance-based compensation.”
This is obvious enough, but when it comes to the advisory side of investment banking, firms have to rely heavily on their reputations to get continued work from their clients. Any young banker looking to carve out a career for themselves is in danger of acting in their own self-interests, rather than those of the customer, suggests the study.
“Investment banking compensation is especially skewed in favour of ‘star’ bankers and the incentive for talented junior bankers to prove their ability quickly is further amplified by “up or out” promotion policies,” write the report’s authors.
Banks therefore need to strike the right balance between “the short-term benefit of being perceived as attracting and developing talented employees and the long-term benefit from being perceived as sustaining a culture in which the client’s interest is protected from the incentive distortion facing unproven but talented employees”.
One solution to this problem, it suggests, is to ensure that junior bankers are not incentivised to take these actions that don’t benefit clients, and the best way to do this is to give senior bankers a bigger share of the proceeds for any deal than juniors. Or, make sure that those higher up the career ladder take a closer look at any the behaviour of any newbies who could potentially damage the reputation of the bank through their relentless ambition.
Arguably, the bar for investment banks’ graduate recruits is being set ever higher. Those securing roles in the bulge bracket firms this year had CVs that boasted sporting achievements, multiple internships, leadership positions, entrepreneurship and exemplary academics. In other words, they’re ambitious over-achievers who will likely apply the same rigour to their career.
This is not necessarily a bad thing – provided everyone is on the same level .“Institutional reputation is easier to sustain when the average quality of the bank’s employees is uniformly high,” says the report. No wonder banks insist on seeing evidence of teamwork in those they eventually take on.