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I’m going to get right to the point. I have little faith that Wall Street will ever get smarter about how they spend their money. The reality is they have too much of other people’s money and deal in such large amounts day to day that they will never take seriously the efficiency and effectiveness of their own management systems. They have seen good times and bad. While they are talking about making dramatic changes now, history has proven that they will only be temporary. Even though they are in a position now where their financial belts will have to be tightened, it will be only for a short time because when the economy improves they will return to their spendthrift ways. Why? Because they don’t know any better and since they are in the business of selling money have come to believe that money will solve their problems only if it is given in large amounts. It is an environment where $100,000 is considered “chump change.” What prompted this blog was an article in Bloomberg News titled, “Wall Street Mulls Partial Pay Freeze” by Jeffery McCracken and Christine Harper.
They talk about the fact that revenues in the investment-banking business have been so bad that they might have to resort to eliminating the practice of boosting pay automatically each year. They quote Joseph Sorrentino of Steven Hall & Partners, an executive-compensation consultancy who said, “Pay increases have been traditionally automatic because there are traditionally very long hours in terms of the amount of work and this is another way to try to boost their morale and signify that they’re a strong part of the firm and that they’re appreciated.” This quote cracks me up because it shows the almost total lack of understanding of the laws of behavior. I can assure you that Mr. Sorrentino has no data showing that the way these investment banking firms structure bonuses improves junior bankers' performance, retention or morale.
It is naïve to think that you can treat people poorly day to day, give them money at the end of the year and think that will create the feeling that “they’re a strong part of the firm and that they’re appreciated.” The reason these firms can get away with wasting millions of compensation dollars is because practically every company in the industry is using the same poor uninformed compensation practices. Therefore, no firm has an advantage or disadvantage. The customer pays the freight. If these firms ever get to a point where they must operate in a more sound way financially, I can suggest several things.
© Aubrey Daniels International, Inc. All rights reserved. 2020