The latest industry to suffer from labor shortages: Investment banking

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After a dismal decade, bankers on all sides had reason to be happy last year. Eighteen months of booming business generated exceptional costs for mergers and acquisitions (M&A) offices. Their counterparts in debt advice acted as midwives to a deluge of newly issued bonds.

Episodes of high volatility supported traders’ earnings. The trading frenzy may have cooled down a bit in 2022, but lenders are licking their lips at the prospect of a sharp rise in interest rates.

Yet the industry faces a severe talent shortage. Banking bosses used the final earnings season of 2021 to lament the problem. Deutsche Bank’s Christian Sewing said he was “very concerned” about a talent war; David Solomon of Goldman Sachs complained that this was causing “wage inflation everywhere”. The subject should come up again this week, when Wall Street banks publish their first quarter results.

A survey of 267 financial services employers, conducted in November by Hays, a London-based recruitment firm, found that 83% had suffered from a skills shortage in the past year. More than half attributed this to competition from rivals. It’s a sector more accustomed to causing shortages than suffering from them, sucking in budding math teachers and disgruntled doctors. His promise of wealth has not faded either: the average salary at Goldman last year was US$400,000 ($584,000 New Zealand). Why have trouble hiring?

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A popular argument maintains that the bank is the victim of a change of generation. Everyone from hiring managers to college career services reports that young workers care less about pay and more about work-life balance. Above all, they want to work for a company with a clear social purpose. All of this jeopardizes the recruitment model of traditional financial firms – high pay in exchange for grueling hours and working with a social value that is not immediately obvious.

Banks must work harder than ever to attract and retain top talent.

Courtney Crow/AP

Banks must work harder than ever to attract and retain top talent.

These apparent preferences are difficult to reconcile with the behavior of young candidates. Darren Burns of Morgan McKinley, another recruiter, says they are getting tougher in salary negotiations, not less. “Decent candidates will line up half a dozen offers when they only followed one before,” he says. They are also more aware of their market value. As a result, even back-office roles in areas once associated with lower salaries are seeing their salaries rise. A senior Wall Street banker puts it bluntly: “They say they care less about pay, but they absolutely care if the bank across the street pays more.”

The attractions of the bank therefore do not seem to have lost their appeal. Instead, the battle for talent is driven by three other factors. Let’s start with the magnitude of the demand for bankers’ work. According to Refinitiv, a data provider, companies announced M&A deals worth $5.8 billion in 2021, up 64% from the previous year and easily beating the previous record from 2007. Initial public offerings also had a banner year, with new IPOs. companies raising $608 billion. And of the $10 billion in US corporate bonds, 42% were issued in the past two years.

All this amounts to an avalanche of work for investment bankers. The industry’s staffing model, meanwhile, is ill-suited to peaks in demand. “If the big banks can’t pay their best people well, they lose them all,” says one headhunter. The only way to do that and stay profitable is to be ruthless on the workforce, running teams with “very little fat” in normal times. When business booms, as it did in 2021, these lean teams very quickly end up working at full capacity – at which point the only options are to poach people from elsewhere or turn down business. The result is a fierce zero-sum skirmish between the banks for qualified personnel.

At the same time, the list of other companies offering bankers exorbitant salaries grew. Private equity funds have long relied on training offered by large investment banks, attracting talent with better salaries and slightly softer working hours. US banks are particularly vulnerable, with an oversized private investment industry offering equally oversized compensation. (Blackstone, one of the largest such companies, received 29,000 applications for 100 junior-level jobs in 2021.) In recent years, these have been joined by a growing cohort of go-it-alone dealmakers doing take companies public through special purpose acquisition companies. . M&A boutiques, which advise on mergers without the full offering of an investment bank, draw even more bankers away from the bank.

Third, there has indeed been a change in the attitude of the workers, but not a change resulting from their refusal to hack the working hours of their predecessors. Florian Pollner of McKinsey, a consultancy, describes how, in conversations with HR bosses, a theme that comes up time and time again is young workers’ more modular approach to their careers. Instead of looking for lifetime jobs, they look for roles they can spend a few years in and then come away with broader options.

This works in favor of banks when recruiting junior staff: their graduate programs are still considered excellent preparation for a career. But it also puts pressure on attrition rates in an industry already known for the mercenary outlook of its employees.

The industry faces a severe talent shortage.  Banking bosses used the final earnings season of 2021 to lament the problem.

John Minchillo/AP

The industry faces a severe talent shortage. Banking bosses used the final earnings season of 2021 to lament the problem.

These forces are changing the way banks recruit and retain staff. Many have long tried to attract employees from a more diverse pool. This task is now more urgent and goes beyond obvious lines like race and gender. Pollner sees banks at all levels recruiting from a much wider range of universities than before – and, just as importantly, trying to hire people with personalities “different from the stereotypical average banker”. Retention efforts also have a darker side: An investment manager at a London private equity fund reports hiring juniors from two separate banks’ M&A offices, only to have the two receive letters from their former employers suggesting they might have to refund premiums (in the end, they didn’t). Like any battle, that of banking talent can quickly turn sour.

The net result in investment banking should be a growing gap between the biggest and most profitable banks, mainly American, and the “second tier” companies, including European banks. The latter have long had to pay more and take on more risk to compensate for not having the prestige and huge domestic market enjoyed by the Wall Street giants, with sometimes disastrous consequences: Credit Suisse and Deutsche Bank have suffered such frequent losses from scandals and exposure to questionable clients that they became the butt of industry jokes.

As second-tier banks struggle to muster the financial firepower to recruit senior talent, this problem will only get worse. The fewer qualified staff they attract, the less business flow they capture and the faster their investment banks have to shrink. In recent years, many European banks have been forced to flee Wall Street or shut down their more racy outfits altogether. More of them could become the victims of the talent wars raging at the forefront of capitalism.

© 2022 The Economist Newspaper Limited. All rights reserved. Excerpt from The Economist published under licence. The original article can be found at www.economist.com

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