Investment Banking Jobs and the Highest Bidder

Investment banking stars will frequently switch firms for higher compensation. And the firms trying to lure these stars often get into a “bidding war” for talent, just like top sports teams.

That’s the theme behind a new book from Harvard Business School Professor Boris Groysberg called Chasing Stars. Groysberg bases his book on an in-depth study of investment banking analysts because they are the ultimate “free-agent” knowledge workers, according a review in The Globe and Mail.

The best analysts are almost like celebrities, appearing regularly in the media. Their expertise will well known and completely portable. An investment banking analyst who switches firms usually follows the same industries, so the job and network needed stays the same. Plus they don’t have to uproot their families. Most continue to work in the New York area. In addition, their performance is carefully tracked by respected trade journals, such as Institutional Investor, which compiles an annual ranking of the best analysts. So it’s easy to compare the “players.”

Groysberg’s main premise: There is often an auction for a star’s services, and the winning bidder, who most liberally estimates the analyst’s worth, will most almost certainly overpay.

This would be fine if the analyst increased his or her output or value to the firm, but that’s not usually the case. Groysberg’s study found that the most mobile stars experienced an immediate degradation in performance. For instance, an analyst who made Institutional Investor’s top rankings and stayed put usually stayed in the top rankings 83.9 percent of the time. Whereas a top-ranked analyst who jumped shipped remained in the top ranks only 69.4 percent of the time. Even after years at a new firm, star analysts who changed employers more frequently underperformed the star analysts who stayed put.

One reason, according to the review, was the impact of the firm’s culture on their performance. Yes, analysts can take their experience and contacts with them. But they sometimes underestimate the special culture or unique economic models which their previous firm provided, or the support provided by other members of the firm. “What they left behind, in short, were the capabilities of the old firm and the practiced, seamless fit between their own skill and the resources of the company,” Groysberg says.

What’s your opinion? Is the grass always greener at a new firm? When is it smarter to stay put at your current firm and when is it absolutely time to move on? Add your comments below.

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