September 26, 2022

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The latest industry to suffer labour shortages: investment banking

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AFTER A DISMAL decade, bankers of all stripes had reasons to be cheerful last year. Eighteen months of soaring corporate dealmaking generated blockbuster fees for mergers and acquisitions (M&A) desks. Their counterparts in debt advisory played midwife to a deluge of newly-minted bonds. Bouts of high volatility buoyed traders’ revenues. The dealmaking frenzy may have cooled a little in 2022, but lenders are licking their lips at the prospect of sharply rising interest rates.

Yet the industry faces a severe talent squeeze. Bank bosses used the last earnings season of 2021 to gripe about the problem. Deutsche Bank’s Christian Sewing said he was “very concerned” about a war for talent; Goldman Sachs’s David Solomon complained it was causing “wage inflation everywhere”. The subject is likely to raise its head again this week, as the Wall Street banks report their first-quarter earnings.

A survey of 267 financial-services employers, conducted in November by Hays, a London-based recruitment firm, found that 83% had suffered from a skills shortage in the past year. More than half attributed that to competition from rivals. This is a sector more used to causing shortages than suffering from them, sucking in would-be maths teachers and disaffected doctors. Nor has its promise of riches dimmed: average pay at Goldman last year was $400,000. Why the struggle to hire?

One popular line of argument holds that banking is the victim of a generational shift. Everyone from hiring managers to university careers services reports that young workers care less about salary and more about work-life balance. Most of all, they want to work for a company with a clear social purpose. All of that puts the recruitment model for traditional financial firms—high pay in return for gruelling hours, and work with a social value that is not immediately obvious—at risk.

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These apparent preferences are hard to square with the behaviour of younger applicants. Darren Burns of Morgan McKinley, another recruiter, says they are becoming more hard-nosed in salary negotiations, not less. “Decent candidates will line up half a dozen offers when they used to only pursue one,” he says. They are also more aware of their market value. As a result, even back-office roles in areas once associated with lower pay are having their salaries bid up. One senior Wall Street banker puts it bluntly: “They say they care less about salary, but they absolutely care if the bank across the street is paying more.”

Banking’s attractions, then, do not seem to have lost their appeal. Instead, the battle for talent is driven by three other factors. Start with the scale of the demand for bankers’ work. According to Refinitiv, a data provider, companies announced M&A deals worth $5.8trn in 2021, 64% higher than the year before and easily beating the previous high in 2007. Initial public offerings had a record-breaking year, too, with newly listed firms raising $608bn. And of the $10trn in American corporate bonds, 42% was issued in the past two years.

All that equates to an avalanche of work for investment bankers. The industry’s staffing model, meanwhile, is ill-suited to spikes in demand. “If the large banks aren’t able to pay their best people well, they lose them all,” explains one headhunter. The only way to do that and remain profitable is to be ruthless about headcount, running teams with “very little fat” in normal times. When business balloons, as it did in 2021, those lean teams very quickly end up working at full capacity—at which point the only options are to poach people from elsewhere or to turn down business. The result is a fierce, zero-sum skirmish between banks for skilled staff.

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At the same time, the list of other firms offering bankers eye-watering salaries has lengthened. Private-equity funds have long piggybacked off the training offered by the big investment banks, luring talent away with better pay and slightly gentler working hours. America’s banks are particularly vulnerable, with a supersized private-investment industry offering just as supersized compensation. (Blackstone, one of the biggest such firms, received 29,000 applications for 100 junior-level jobs in 2021.) In recent years, these have been joined by a growing cohort of dealmakers going it alone and taking firms public via special-purpose acquisition companies. M&A boutiques, which advise on mergers without the full-service offering of an investment bank, entice still more bankers away from banking.

Third, there has indeed been a shift in workers’ attitudes—just not one that results from them being unwilling to hack the hours of their predecessors. Florian Pollner of McKinsey, a consultancy, describes how in conversations with human-resources bosses, a theme that comes up time and again is younger workers’ more modular approach to their careers. Instead of looking for jobs for life, they seek out roles they can spend a few years in and then leave with broader options.

That works in banks’ favour for recruiting junior staff: their graduate schemes are still seen as excellent preparation for a career. But it also puts pressure on attrition rates in an industry already known for the mercenary outlook of its employees.

These forces are changing the way banks recruit and retain their staff. Many have long tried to draw employees from a more diverse pool. That task is now more urgent, and goes beyond obvious lines like race and gender. Mr Pollner sees banks at all levels recruiting from a much broader range of universities than they used to—and, just as importantly, trying to hire people with personalities “different to the stereotype of the average banker”. Retention efforts have a darker side, too: an investment manager at a London private-equity fund reports having hired juniors from two separate banks’ M&A desks, only to have both receive letters from their former employers suggesting they might have to repay bonuses (in the end, they did not). Like any battle, the one over banking talent can quickly turn nasty.

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The net result within investment banking is likely to be a widening gap between the largest and most profitable banks, chiefly American ones, and “second-tier” firms, including European banks. The latter have long had to pay more, and take greater risk, to compensate for not having the prestige and huge domestic market that Wall Street giants benefit from, with sometimes-dire consequences: Credit Suisse and Deutsche Bank have suffered such frequent losses from scandals and exposure to dubious clients that they have become the butt of industry jokes.

As second-tier banks struggle to muster the financial firepower to recruit senior talent, that problem will only worsen. The fewer skilled staff they attract, the less deal-flow they capture, and the faster their investment banks must shrink. In recent years many European banks have been forced to flee Wall Street, or close their racier outfits altogether. More of them may become casualties of the talent war raging at the cutting edge of capitalism.

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