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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Business school is not the real world. For proof, look at the topic of financial sector pay. Management scholars spend hours lecturing students on why it is folly to focus on rewarding individual performance; fresh-faced MBA candidates nod politely, then rush off to whichever investment bank promises the best end-of-year bonus.
Jefferies, the last of Wall Street’s large independent broker-dealers, has until now taken a particularly old-school approach. It announced cash — not share-based — bonuses worth $385mn in 2024, with rewards typically driven by how much business individual bankers manage to bring in.
Chief executive Rich Handler is now warming to the kind of ideas academics were debating back when he was at Stanford in the 1980s. Jefferies is changing its bonuses to encourage more collaboration, the better to serve large corporate clients with more complex needs. The shift has good intentions, but it takes more than tweaking pay to turn the residents of a shark tank into a well-functioning school.
The theory behind Jefferies’ new approach is straightforward enough. If individual performance is almost all that matters, there’s no point sharing skills or contacts with colleagues. Basing rewards on collective success should motivate staff to do what’s best for the company — in Jefferies’ case, perhaps helping to land a whale of a client that can feed the whole bank instead of lots of small fish on their own.
The counter is that collective rewards just encourage free riders. And if a new bonus scheme redistributes without enlarging the overall pot, the highest flyers may start to look elsewhere. Besides, if it ain’t broke, why fix it? Shares in Jefferies have risen more than 250 per cent over the past five years, comfortably outperforming Morgan Stanley and JPMorgan, and in line with Goldman Sachs.
But bankers who make this argument are telling on themselves: most studies find that free riding is generally not a big problem — as long as an institution has a decent culture. If staff like each other and their work, they try to avoid letting down their colleagues. The problem comes when working conditions are so bad that maximising pay becomes the only way to put up with it.
Goldman Sachs — the bank Jefferies would most like to emulate — is an instructive example. It is easy to sneer at David Solomon’s obsession with “One Goldman Sachs” — his initiative to break down internal silos. But he has a point: cultural change takes years and encompasses every aspect of a firm’s operations. Even for the most venal, money isn’t quite everything.
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