Faced with stagnant revenues and large fixed salaries, investment banks appear to be clearing out senior staff and making way for vice presidents (VPs) to take on more responsibility. Except VPs aren’t getting paid more for their efforts.
“In previous cycles, the feeling had always been that banks had taken out a lot of junior people and that the senior staff had stayed,” says James Chappell, an analyst at Berenberg in London. “But now that salaries have risen, banks are under more pressure to clear out expensive senior staff and let the talented juniors and mid-ranking people come through,” he adds.
Morgan Stanley, for instance appointed fewer managing directors in its announcement yesterday. The Wall Street Journal said the bank appointed just 144 new managing directors for 2013. In a normal year, it appoints 250.
Brad Hintz, an analyst at Bernstein Research told Reuters that Wall Street banks are in the process of “generational change”, otherwise known as, “you promote the young guys and you don’t pay them.”
Headhunters in London say this strategy is being employed particularly in the equities businesses, which announced aggressive layoffs last year. “The model is changing,” says Zaki Ahmed, director at Financial Search Limited, which focuses on front office banking positions. “Banks are giving VPs more exposure because they’re cheaper. At the big banks, managing directors are now on base salaries of £300k, so it makes sense,” he adds.- “The VPs are getting more responsibility, they’re just not getting any more money.”
J.P. Morgan is among the banks said to be pursuing the promote-juniors policy. Headhunters point to the rise of associates such as Ashik Mussadi, who joined the bank in India and has risen through the ranks as a life insurance analyst in London, or to Delphine Lee, a VP-level European banking analyst who’s risen to prominence following the departure of Carla Antunes da Silva and other highly ranked members of J.P. Morgan’s banks team to Credit Suisse in 2011. J.P. Morgan didn’t respond to a request for comment.
“A lot of banks are looking at the market and deciding that as long as there’s a decent senior banker on a team, it makes sense to let associates and VPs take more responsibility,” says Oliver Rolfe, managing director of search firm the Spartan Partnership. “If senior people leave, they will usually try and replace them with pretty decent juniors & VPs in the existing team,” he says.
This can turn off clients. The Financial Times recently reported that clients have begun including “key man” clauses in contracts for M&A deals, ensuring that their chosen senior adviser doesn’t disappear before the deal has been fully executed.
Chappell says letting go of senior staff and relying on mid-rankers and juniors is a risk, but can make sense. “The problem is that you lose experience and relationships, but some banks may take the view that it will be a while before things pick up and that more junior staff will have time to build relationships in the interim.”