Managing Director & Senior Partner, Leader Financial Institutions Data Solutions Suite
Ever since the 2008–2009 financial crisis, and increasingly over the past several years, investment banks have found themselves in a battle to attract talent. For one thing, innovation in the capital markets and investment banking (CMIB) industry is likely to pick up again as the regulatory environment stabilizes and new forms of compliance solutions need to be designed. Successful innovation will require a broader set of skills in the front office in areas such as technology, data, and regulation—all concentrated in fewer employees. Moreover, there will be greater emphasis on the post-trade side of the value chain, with greater numbers of high-caliber people needed in areas such as operations, compliance, legal, and risk. In addition, rising litigation costs have highlighted the industry’s need for employees who are knowledgeable about—and act in accordance with—new and evolving regulatory parameters.
There is some evidence that the turnover rate in the CMIB industry has increased among both younger cohorts and senior staff. Indeed, traditional buy-side institutions such as hedge funds and private-equity firms—as well as some newer suitors such as social-media and technology companies—are doing their best to attract the brightest minds. With a 25 percent drop in the average CMIB compensation package since 2010, the compensation gap between investment banking and other sectors has narrowed and has even become negative in the case of hedge funds and private equity firms. Social-media and technology companies are attracting Millennials by appealing to their desire for global experiences, high levels of responsibility, rapid advancement, and an attractive work-life balance. Overall, investment banks are losing the human resources battle.
Meanwhile, heavy regulation is also having a significant impact on the ability of the CMIB industry, whose compensation policies have always been a primary lure, to compete for top talent. For example, Capital Requirements Directive (CRD) IV caps the bonuses of “material risk takers”—those who earn more than €500,000 per year in total compensation or who fall within the highest-earning 0.3 percent of the bank’s staff—to a 1:1 fixed-to-variable ratio that can be increased to 1:2 only with board approval. This rule is putting European banks at a disadvantage compared with their U.S. peers. Section 956 of the Dodd-Frank Act requires banks to prove only that bonuses are not excessive and do not create incentives to engage in overly risky activities.
A string of ethical scandals and public scrutiny of bonuses have led banks to focus on revising compensation packages for their senior bankers, introducing scorecards linked to compensation and designing their learning and development curriculum around compliance topics. We believe that such efforts have come in part at the expense of putting sufficient resources into developing the careers of the vast majority of banks’ employee bases.
What is the best way forward? CMIB institutions must identify what the investment banker of the future looks like and take steps to attract this type of individual. The next-generation investment banker needs to possess a broader set of skills, have an entrepreneurial and innovative spirit, and embrace a strong cultural sense of compliance, collaboration, and client service. Investment banks also need to overcome their reputation as places that do not rank high on “best places to work” lists. Only one investment bank has ranked in the top 100 best companies to work for in the U.S. in recent years. Nor do CMIB institutions rank high among the top 50 LinkedIn inDemand employers, currently dominated by technology companies. Investment banks will therefore need to radically change their value propositions in order to appeal to this new generation of employees. They must also find ways to develop the raw talent that they acquire.
To deliver this change, strong governance and long-term commitment from the top will be required. We see two areas of immediate focus.
First, work on people development:
Second, work on strategic workforce planning: