Do Investment Banking Job Bonuses Really Work?

As major banks get set to hand over billions of dollars in bonuses to employees, despite much public indignation, the Times Online UK examined whether these types of incentives really do what they’re supposed to: namely, prevent top employees from leaving.

The article quotes Geraint Anderson, the author of Cityboy: Beer and Loathing in the Square Mile, and a former utilities research analyst at Dresdner Kleinwort, offering the traditional viewpoint: “The simple fact is, you go into the City to make money. Firms are hiring at the moment and staff will leave if they are not given bonuses. The banks will show staff no loyalty in bad times, so why should staff be loyal in return?”

However a new book by Boris Groysberg, an associate professor in organizational behavior at Harvard Business School, suggests otherwise.

Groysberg analyzed 1,000 “star” analysts at 78 investment banks, along with 20,000 non-star analysts at 400 firms. His surprising conclusion: “Exceptional performance is far less portable than is widely believed. We found that mobile stars [bankers who leave one company for another] experienced an immediate degradation in performance that persisted for at least five years. Thus their exceptional performance at their prior employer appears to have been more firm-specific than is generally appreciated … Banks behave as if stars deserve and should appropriate all the value they generate, but stars without the companies they work for might not be stars.”

Jeremy Batstone-Carr, the head of private client research at Charles Stanley stockbrokers, goes a step further. He suggests that bonuses ” are paid out not when a company is doing well but when it looks as if a company is doing well; they reward short-term performance; they reward people who are just lucky to be in the right place at the right time; the “performance” element of a performance-related bonus is entirely subjective; bonuses cease to be effective after a while because people come to expect them, like a salary.”

Nevertheless, bonuses are not likely to disappear from the banking industry anytime soon. Not because they’re deserved, but because bankers, even if they secretly admit they are grossly overpaid, understand that if they don’t grab their share, somebody else will.

As a friend of the article’s author notes, “With only a very few, seriously deluded, exceptions, no one believed that we were worth the equivalent of 100 teachers or 50 doctors … We all knew it was absurd … but if we didn’t take as much of the cake as possible, someone else would. It all came down to the size of the bonus pool.”

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