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From Ferrari to Trabant

From Ferrari to Trabant

The outflow of senior bankers is the first sign. Why bother hanging on in an industry where the effort to reward ratio has changed irrevocably for the worse? - Where justifying your premium over hard working, cheaper, junior staff, is a daily struggle? - And where the amount of work being asked of you is more superhuman than ever before?

At the same time, when the big rewards that made it all worthwhile have disappeared, why bother queuing to get into such an industry at the junior end?

The tale of the overworked equity researcher at Goldman Sachs

In a sign of the crazy amount of work required in this era of margin compression, Reuters reported last week that Goldman Sachs had suspended a VP-level equity research analyst who’d been covering 18 financial services firms. Even this didn’t seem financially viable: having dispensed with its analyst, Goldman simply suspended all coverage of the firms concerned.

If workloads are up, pay is falling. Investment banks’ bonus pools were down anything from 40-60% year-on-year in 2011. This has been partially - but not totally - mitigated by rising salaries, but that may not last. Goldman is already said to be reversing its salary increases for VPs and MDs.

As we wrote last week, average compensation per head at Goldman went from $661k in 2007 to $367k in 2011. The firm argues that this is partly due to the addition of lower paid, less productive staff in growth markets. But it seems hard to conceive that people inLondonandNew Yorkaren’t being punished too.

At Credit Suisse’s investment bank, compensation per head went from CHF495k to CHF318k over the same period; at UBS it went from CHF474k to CHF337k.

Only JPMorgan and Barclays Capital have increased pay over the past five years

On a pay per head basis, only BarCap and JPMorgan look like a good bet over the past half a decade: compensation per head at the former rose from £182k in 2007 to £202k last year; at JPMorgan, it rose from $312k in 2007 to $342k in 2011. At BarCap, this looks unsustainable: absent a big increase in revenues in the first half of 2012, the bank will need to cut costs a lot more vigorously – and soon.

BarCap isn’t alone in feeling the cost pressure. The Financial Times estimates that in order to achieve an ROE of at least 10%, Goldman Sachs, Morgan Stanley, Credit Suisse and RBS will need to increase revenues or cut costs by £7.5bn between them.

Employee arbitrage

In the circumstances, you might think graduates would be put off. However, investment banks remain by far the most remunerative graduate employers – paying nearly 20% more in first year salaries than their closest rivals (law firms). This may be why BarCap received 107,000 applications from university students last year.

The opportunity for employee arbitrage is clear. Credit Suisse has already declared its intention of swapping out expensive senior staff for cheaper juniors.  Other banks are likely to be doing the same. But if you join a bank now, you need to be aware of two things: you will work harder and longer, for a lot less money, than your predecessors only a few years before. Welcome to the era of diminishing returns.