Changing Investment Banking Compensation

The investment banking compensation model is broken, and it’s going to take both PR efforts and structural changes to fix it. That’s according to Steven M. Davidoff, a former corporate attorney and now a professor at the University of Connecticut School of Law, who outlined both problems and a possible solution in a recent article in the New York Time’s Dealbook blog.

Rightly or wrongly, many Americans blame the banks for the recent financial crisis. And when millions of people are losing jobs that pay far less than the $400,000 base salary of a senior banker, there is little sympathy for executive compensation. Hence the fertile political climate in Washington for salary and bonus caps.

Davidoff says Wall Streeters may be aware of the attitudes on Main Street, but still not taking them as seriously as they should. Hence the major PR missteps of $35,000 office commodes and last-minute bonus packages. The criticism is only going to get worse, he says, if Wall Street doesn’t play the public relations game better.

An even bigger problem for investment banks is having them consolidated into the “financial behemoths” of recent years. This weakens overall employee loyalty and makes global risk monitoring that much more difficult.

The solution, he says, is to return to a compensation structure that will pay well in good times yet tie employees to the firm in bad times. Perhaps a return to the time when many Wall Street investment banks were partnerships, and senior executives had a personal stake, and capital, locked into their enterprise. This structure means each partner has a role in monitoring risk, along with the pride of being a partner. It’s no surprise, Davidoff says, that the two surviving independent investment banks are Morgan Stanley and Goldman Sachs, two firms that have preserved the partnership culture.

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