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Oh boy. It’s definitely all about working at a 2nd tier Ibank. Less work, similar pay. And isn’t that what life is all about?

Is Ibanking evil? That’s debatable. Is Ibanking drawing the wrong crowd for the job? Yes.

Investment banking incentives already play the wrong crowd the wrong way. Now, they are building an entire new generation of people joining finance for all the wrong reasons. Here’s what I think:

Banks need to realign their recruitment structure so that they don’t hire people who are interested in finance for the wrong reasons. That is the only way they can avoid the decline in quality of work when pay is cut.

I’ve already covered the problems in my previous two posts: essentially, if you hire people with interests in finance seeded by money, they will be unable to work as hard or exit the job when you take the monetary part of their job away from them. This is dangerous, especially since you take away monetary compensation usually during recessions, when you need them the most.

And after hearing this “it’s all about working in a 2nd tier Investment bank” comment from a student at the University of Chicago, I can only conclude that our incentive systems are breeding a bad generation. His justification for his statement was simple: at a 2nd tier investment bank, he could work for substantially less hours, yet still make a fair amount of money. So really, working in finance has boiled down to this for students: the key to an easy, relaxing life.

Ok, sure, I respect that. There is nothing wrong with wanting to live a secure, upper-middle class life. Definitely nothing wrong on the side of the student, but definitely something wrong from a human resource perspective. In good times, they work hard, play hard. That’s respectable. Unfortunately, finance is changing. It has become a much more dynamic industry, with recessions relentlessly hitting the markets.

I feel as though it is time for some human resource changes. Hiring smart people who just wanted a secure life used to work. It was a mutually beneficial relationship: I provide you better and better financial security, you make sure our clients can milk this bull market for what it’s worth. I still can’t help but state my managing director’s word of wisdom again: “even my son in middle school can make money in a bull market.” What’s hard is the bear market, and this is where we test whether our smart students are really all that intelligent.

Now, the market conditions inevitably force us into a relationship of: “you’re getting a pay-cut, but we still need you to somehow figure out how to milk this bear market for what it’s worth.” It’s not that you didn’t hire smart people. You did. They just now have no incentive to apply their smarts, and roll out intelligent remarks anymore. Sure, the risk of losing their job will act like a whip to force them to work, but to what extent is the whip making them roll out top-notch work? Are they doing the bare minimum just to not get fired because the cuts are giving them low morale?

Speculations, speculations indeed. Who knows what will happen when we actually do hire different people? Guess it’s all up to investment banks to take that plunge and start hiring different people. As some random guy on the CTA said to me (this is the only reason I ride public transportation): “there’s a difference between being smart, and being intelligent. And I think you are just smart, but not intelligent.” What’s the difference? Intelligence is applying your smarts in all situations, and being smarts is just having the tools.

Guess we need to start recruiting more of the latter, even if it means not necessarily taking the best out of each school. It is rather hard to get an army motivated by money. There needs to be a higher cause they can appeal to in times of mental stress. And people whom you can appeal to that higher cause with are those who had their interest not seeded by money.

But wait, even if they do it for the money, don’t they realize that getting something to work in the bear markets will mean bonuses in the future? Well, given the short-term tunnel vision of many bankers, and how they are jumping ship to buy-side the moment pay is cut, I would wager that they actually place a large discount on the benefits of better prospects 2-3 years down the road.

Why not just simply raise incentives in bear markets then? Well, the average corporate whore isn’t that simple. Their incentives are rather misguided. The learned enough in school to do well in a good economy, and the effort has brought them to a top tier (or second tier) investment banks with excellent (or still very good) salaries. Here’s the problem though: the incentive in a bull market is to focus on the bull market and milk it for what it’s worth, and not focusing on how to conquer the next bear market three years later. And, when the recession actually hits, students from top tier universities searching for a “good life” then are paralyzed with the fact that their easy effort no longer works, and are faced with an obstacle not easily overcome.

Well, that’s one thing the desire for money never taught them. My former managing director once said (yes, I quote him a lot, but he was a great guy): “the only way to learn is to lose money.” But that sense of failure is exactly what top tier college students are afraid of. They flock to investment banks because there is a guarantee, that worst comes worst, I’ll take home 75k. If it’s a good year, I’ll get a shot at 120k. The desire for economic stability, not absolute greed, is destroying the financial services industry in the 21st century.

I suppose this is the result of a generation that has seen three crashes over the course of a decade. While in the 80s and 90s, the motto was “greed is good”, the motto today is “yeah, I’ll just work for 10 years and enjoy my earnings.” I would have to argue, though, that this mindset reduces the bank to stasis. The ambition to make great leaps forward are gone.

Wait, that means high risk high return is gone, right? Well, unfortunately not. Unsolved problems don’t disappear. What we have now, is a mixture of drones that have a high risk high return mindset. “I’ll make this risky bet. Worst comes worst, my managing director scolds me and lose my bonus, but that’s still a good 75k. If not, I’ll probably have a shot at making 150k, which will provide me better financial security.”

Investment banks need to reconsider their staffing arrangements. Arranging incentives is one thing, but choosing the right people is another. It’s not about people who can overcome obstacles of a recession, it’s about people who are willing and able to overcome the obstacles of a recession.

Disclaimer: I’m not saying all investment bankers have this problem, I’m saying a growing population is having this problem. While I realize many people have student loans to pay-off and families to feed, I nevertheless feel from a human resource management standpoint, that this is a rather troublesome problem that deserves some attention.


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