December 3, 2015    5 minute read

What determines the salary of a Banker?

   December 3, 2015    5 minute read

What determines the salary of a Banker?

The financial industry has always attracted human capital through high pay and social status. These two tools are the bread and butter of the industry, which is widely known for its controversies and conflicts of interest.

Whilst some facets of the public may think the industry is the homeland of wicked minds and shrewd individuals motivated only by money: many people who work as “bankers” really are passionate about their job and chose it not for wages nor perks. On the other hand, it would be naïve to think that this industry dwells with individuals moved only by high spiritual intentions.

A politically correct manner to approach the issue the issue may be such that many people were spurred into the profession due to the expectation of a high salary, the majority of whom possesses high ethical values and social interest. In addition to this portion, the industry is also populated by professionals who hold a true passion for finance and the job they perform.

The question bears no simple answer, and as the time goes by, many pillars of the finance industry are being shaken and even torn apart.

In general, the high pay of an industry derives for the most part straight from the profitability of it. In a utopic and perfectly functioning market economy, those who perform well, despite the industry should be rewarded financially for their efforts This seems to be absolutely meritocratic and ethically sensitive, but it is also far from empirical evidence.

Suppose you are a Mathematics virtuoso, endowed with amazing skills and incredible intuition. After graduating “summa cum laude”, you receive two offers: one to continue your studies to get a PhD and the other to go work for an investment bank in the City, where you will be rewarded with a generous salary. This simple example, perfectly explains how personal skills are not a direct function of pay, for the wage gap across industries is wide.

The ratio of profit per employee gives a glimpse of how much value each individual creates to the organisation as a whole. One can easily see that each Goldman Sachs professional generates on average $249,323.53 of profits per year, while in turn making $383,000 on average. Another top investment bank, Morgan Stanley, shows $62,130.39 of profit per employee, with a pretty similar average salary. From these numbers, the reader can immediately notice a substantial difference between the two firms.

However, banking is not the only profitable industry, for example a worker at ExxonMobil, creates on average $431,872.51 of profits per year, but making a lower (yet still pleasant) salary; a Google professional generates $240,829.67 in turn, with a salary that is becoming closer and closer to the one of its peers on Wall Street.

These figures, although not exhaustive, still grasp an interesting concept: at a first level, the salary of an individual is determined by the industry he/she works in, after this step, the determination lies on the name of the company which pays the wage. This is because companies compete for human capital within industries and need to attract the best by offering a highly competitive salary and (only after that) other suitable perks. Morgan Stanley is not as profitable as Goldman Sachs, but still is one of the top five IBs in the world and has to attract human capital at the cost of slicing its profits through high pay; if this were not the case, the world famous bank would be quickly downgraded to a middle table position due to the loss in human capital and reputation.

Historical context is therefore an important driver of these figures: bankers have always been vastly rich hence, even during hard times, if one bank manages to pay a high wage to its employees, the other must follow or yield. After the financial crisis, a plummet in wages of financiers was registered, but this was immediately followed by a steady growth which continues to this day; on the other hand, many branches of these firms (especially sales and trading) have suffered the blow of regulation (and rightfully so), this begs the question of how long can banks sustain these pay for workers who are becoming less and less profitable and, at the same time, are being replaced by technology? The answer lies in the ability of banks to trim their workforce at a faster pace than the one of wage reduction but eventually, if these jobs are to be replaced by technology and/or crushed by regulation, investment banks are to relinquish their status of high paying companies.

The working hours

The issue of long working hours is another key to world of finance. All-nighters, office at 7.00 am and missed weekends are a mantra of the industry. But is this the only industry which features stressful work life and little free time? No. On one hand, people in investment banking are meant to stay at the office till night, regardless of the workload they bear. But other jobs require long hours too. A researcher, whether a physicist or a chemist, might have to stay in to finish an experiment of a paper; a doctor might have the nightshift and sleep in.

So where does this rumor come from? Probably from the public opinion attached to the iconic figure of the banker, but there is little evidence that these professionals work more hours than other highly skilled individuals.

Having examined yet another feature, the answer to the question of the origin of bankers’ pay looks brighter as the circle of possible answers get narrower. In general, people in the world of finance (traders, investment bankers and others) receive a high salary, due to the high profitability of the industry they work in. Nevertheless, technological advancement and heavy regulation are mining the returns of some these companies’ arms, consequently harming the future salaries of the people employed.

In addition to these motives, the prestige and social status of this world has maintained high wages through time and across companies, although the future will pose harder and harder challenges to these companies.

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