Junior Bankers Have Been Underpaid for Way Too Long: Jared Dillian

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.