Junior Bankers Have Been Underpaid for Way Too Long

(Bloomberg Opinion) -- Young Wall Street analysts are benefitting from the war for talent among investment banks. Compensation has soared tens of thousands of dollars in recent months, with some firms now offering as much $120,000 a year. These numbers may seem outrageous for fresh-faced college graduates crunching spreadsheets, but they’re not.

When I was hired by Lehman Brothers Holdings Inc. in 2001 as an MBA graduate in sales and trading, I was paid $135,000, including bonus. The analysts were making about $65,000 a year. Until the recent bump in analyst pay, compensation had barely kept pace with inflation, with $65,000 adjusted for inflation coming out to $100,000 in 2021. It’s not so much that analysts are overpaid now, it’s that up until recently they were underpaid.

Analysts perform an important function at investment banks: they get lunch. I’m serious. They handle tasks that bankers and traders are too busy to take on, and it’s better to send the person making $120,000 to get lunch than the person who’s making $1,000,000 to get lunch. The senior banker’s time is infinitely more valuable.

So why pay someone six figures to get lunch? Because analysts are essentially apprentices. The types of things an analyst might do -- booking trades or manipulating spreadsheets -- does not add a great deal of economic value. It’s manual labor of sorts. But a junior trader or banker is learning how to become a senior trader or banker who may one day become very profitable for the firm. On any particular banking deal, it’s not the spreadsheet work that adds value, but rather the strength of the relationships between senior bankers and clients that have been cultivated over many years. If it were possible to automate these analyst functions, banks would, but then you wouldn’t have a pipeline of people who would one day become senior bankers.

Like any part of the labor market, Wall Street jobs are a function of supply and demand. Fewer college graduates have a desire to get into banking these days, and recruiting departments struggle to find the types of candidates they were able to easily attract in the past. When I started working on Wall Street, actual rocket scientists wanted to work in finance because finance paid better than any other job. No more. Also, there are areas in finance outside of banking, like electronic market-making and private equity, that are even more remunerative with a higher quality of life. These days, undergraduates in business frequently go into the startup world for the promise of IPO riches. And the sorts of things you used to be able to do in banking 20 years ago -- like proprietary trading -- don’t exist anymore, due to regulation.

It seems as though the Wall Street labor market has finally reached equilibrium after years of being chronically overstaffed in the years following the financial crisis. This means workers are in a better position to demand higher wages, especially with the New York State Comptroller’s office noting that securities industry profits are up 256% since 2015. Although there is a reduced supply of analysts, banks still need a pool of unskilled labor to handle basic tasks. 

What’s puzzling about this whole situation is how much some banks have resisted pay increases. It doesn’t cost them that much. If a large bank hires 200 analysts, and they’re making an additional $20,000 a year, that’s $4 million annually -- a rounding error in terms of most banks’ profit and loss. Of course, pay increases at the low end lead to pay increases at the high end, but if you’re just looking at the analyst pool, it’s not a lot of money.

The other aspect of this is that the cost of living has increased dramatically since 2001. Rent, food and nearly everything else is much higher than it was 20 years ago. This may come as a surprise to some, but $120,000 does not go very far in New York—or any other urban area, for that matter. It certainly doesn’t leave much in the way of an entertainment budget, and it is going to be practically impossible to max out contributions to a 401(k) retirement plan. More importantly, the cost of higher education has increased dramatically in 20 years, and young people are encumbered with bigger student loans.

I have no problems with 22-year-olds making $120,000 a year. They do the work that we would otherwise find stultifying, and they live in apartments that you or I would not want to live in. They do this in hopes that they can one day run a desk or a division, which is where the serious money lies. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about.

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