The Risk-Reward Ratio in Brokerage Jobs?

I was talking to a Managing Director in Equity Research about the differences between investment banking and equity research and realized that there’s a lot more risk in equity research than investment banking.

I’ve always assumed that there was a proportionate risk to reward ratio for most brokerage jobs. Sales and trading with a large inherent risk (losing your job if you don’t do well) would have the largest possible rewards (large juicy bonuses). On the other hand you have investment banking which is considerably more risk averse (you can’t single handedly lose $7.2 billion), thus having a smaller compensation range.

But this seems to stop holding true for equity research. You’re putting your neck on the line when releasing analyst reports. These reports should be right more often than not. If not, it won’t take long to be out of a job… Thats definitely a lot more pressure than filling in commas and double-checking models in investment banking.

Yet investment bankers get paid a lot more. Why? There’s probably some reward that is more intangible than cold hard cash so I added working hours to the mix.

Even though they’re both brokerage jobs, its probably unfair to be comparing research with investment banking since the jobs aren’t that similar. One could just like doing stock analysis rather than endless DCF models. And of course theres a lot more involved than hours and compensation. But from a purely financial point of view, it certainly makes the risk reward graph look a lot more logical.

EDIT: Goldman Sachs’ chief investment strategist (Equity Research), Abby Cohen has just been demoted for painfully wrong predictions… It just goes to prove that equity research seems to have a disproportional risk to its reward…

Investment Banking Hours, Investment Banking Pay

I have a Human Resources midterm coming up on Friday and was reading up on recruitment and selection. One of the problems companies face is that they have certain budgets and costs that is a constraint against hiring the best talent. With this in mind, companies have to make do by hiring less qualified people in order to fill up job vacancies.

But lets stop right there and put up this hypothetical situation. Assuming hiring a genius would cost $100,000 a year, and hiring an average person would cost $50,000 a year, and there are two job vacancies, would it make sense to hire the two rather than the genius?

Now in the investment banking world, people work 100 – 120 hours a week. Thats easily more than double what a normal 9 – 5 job would entail. So why do people go through such an ordeal? Reasons range from an interest in finance, an Excel addiction, prestige, etc… But regardless, the investment banks make sure their employees are appropriately compensated with a lot a lot of money and thus manage to attract the best talent in the world.

So why don’t these investment banks simply hire two people to do the job? It could simply be the banking way of doing things but I’m convinced its because that way they can continue attracting talent into their organizations. Investment banks are a lot like technology companies, its success depends almost entirely on the ability of its people. As such, attracting the very best is absolutely necessary for the organization’s continued survival and growth. By giving undergraduates $100,000 a year for an entry-level position, geniuses enamoured by the pay will be willing to overlook even the most insane hours.

Perhaps this is the route companies will take in the future. The aging population will be causing a labour shortage and with limited qualified applicants, those applicants will be very highly paid. In exchange for doing the work of two.