As I previously mentioned, investment banks have a core issue: they want to hire kids who are interested in finance, but kids are interested in finance for, probably the wrong reasons.
Now, I’m not saying 100% of people working at an investment bank have this problem, I’m just saying the population of this type of people is large enough that it deserves some concern. Every interest has a seed. For example, watching a guitar player get girls might seed your interest in guitar. Watching Michael Jordan move a crowd with a buzzer beater might seed your interest in basket ball.
Learning that you can make 100k straight out of college, and make 300k a few years on the job might seed your interest in finance.
Hence, with bankers having their interest in finance hinging on the pay itself, the structure of the interest may be unstable, no matter how developed it is. Hence, IBankers called quits quickly when pay was cut during the Eurozone crisis. The foundation of their interest in finance was toppled, so they couldn’t take the stress of the job anymore.
Before an investment banker says: “Hey, I sacrificed my youth for this job,” I want to bring up this anecdote form a friend who did some work with Doctors Without Borders in Libya recently. Because of the fighting, they were constantly on the move. Because so many were hurt, they rarely got a moment’s rest. He makes $1400 (yes, that’s 4 figures) a month, but he said his work wasn’t about the money. He had to do work over 100 hours a week during the height of the conflict, but it was about the satisfaction of the job. Why would you work a job you don’t gain satisfaction from?
And this is where the system collapses. Quoting my former MD: “Even my son in middle school can make money in a bull market.” Ok, that’s exaggerating it a bit, but the point is, the time when bankers and their intelligence are needed the most is not during a bull market when they are making the most money, but during a bear market, when they are making the least money.
Here’s the conflict of interest I don’t understand. If you spoil a banker with high bonuses during a bull market, they will just complain and not work to their full ability (or even quit) if you cut their wages because you are simply out of money to give them.
Rather, here is my proposed system of awarding bonuses:
Pay a low bonus during a bull market, and keep that low bonus for those who outperform the market during a bear market. Then, if your financial institution survives a bear market, reward employees who have performed exceptionally well during a bear market heavily.
TL;DR: Large bonuses for good performance in bear markets, not bull markets.
Everyone has read Freakonomics. We all know “people respond to incentives.” So let’s provide our bankers here with the right incentive to give insightful financial proposals so they can help us through the crisis, not rage quit.
Note: I wrote this assuming the market has no negative financial products that can be used to exploit people during a financial crisis. I am more writing this for banks who think of innovative strategies to weather a recession for their clients, rather than those who use recessions to screw their clients over. So please don’t post angry comments stating something along the lines of: “Bank A did this to screw over people in the recession, and they made money! That deserves a bonus?!”