Why Wall Street Won’t Ever Change Their Spending Ways

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.

1. Every problem cannot be solved with money, even on Wall Street.  What causes people to quit and go to another company is more about the way they are managed than the money they make.  If employees are treated poorly, they will leave for a dollar more.  If they are treated well, it will take a lot more to hire them away.  Make no mistake, loyalty cannot be bought.  Big bonuses have often helped a disaffected employee start a competitive company or retire early.
2. Bonuses that are not earned, more often than not, do not strengthen productive behavior because that is not the contingency involved in receiving the bonus.  While upper management believes that annual bonuses increase loyalty and performance, they do neither because they don’t have to be loyal or productive to receive one.  They have to do just enough to stay on the payroll.  Of course management doesn’t believe this because if they did, they would make immediate changes where nothing would be automatic that was not individually earned.  A system where employees knew the personal accomplishments they had to achieve to earn the money would be far superior and less costly.
3. Forget what rival firms do.  Focus on promoting to management only those who have good social skills and an understanding of the science of behavior.  Pinpoint the behaviors and results that are valuable and generously reinforce those behaviors and reward those who produce the results.  That way, the only thing that executives will have to “mull over” will be how to spend the money that is left over.