Are Bonuses On The Way Out At Investment Banks?

Critics argue that big bonuses fuel a culture within banks to seek short-term profits by making overly risky bets in various markets, such as the sub-prime market. The issue heated up after insurance giant AIG awarded bonuses to executives in the very unit that caused many of the firm’s financial problems, sparking more public outrage over the disparity between investment banking compensation and ordinary workers’ salaries.

But a study published by the National Bureau of Economic Research shows that the disparity between financial salaries and other industries tends to be cyclical. Financial salaries reached a peak in two periods, the late 1920s to 1930, and not surprisingly, the recent boom period from the mid-1990s to 2006. In those years, compensation for financial jobs was 30 to 50 percent higher than other industries.

We will probably see a slight pull-back in overall compensation for a year or two until the economy picks up again. Especially since there is currently a surplus of experienced investment bankers who are looking for new positions, after having been let go from major investment banks (or having watched those banks vanish or be swallowed up by other firms.)

Nevertheless, bright, ambitious, skilled young people who are motivated to make a lot of money will still find a career in investment banking to be more financially rewarding than many other career paths.


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