Oxford study shows that encouraging a ‘star’ culture is one of the fastest ways for investment banks to erode their reputation with clients

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As cinema-goers flock to see "The Wolf of Wall Street", research from Saïd Business School shows performance-based compensation may cause junior bankers to act in their own self-interests, which are often at odds with those of their clients.

Highly skilled and talented young bankers are often keen to make an impression with their employers who offer generous incentives for those who can demonstrate ability.

But a recent study ‘Investment Bank Reputation and “Star” Cultures’ by Professor Alan Morrison at Saïd Business School, Zhaohui Chen and William Wilheim of the University of Virginia, shows performance-based compensation may cause junior bankers to act in their own self-interests, which are often at odds with those of their clients. This culture gives rise to reputational conflicts, and has contributed to a decline in investment bank reputations in recent years.

‘Investment-banking compensation is especially skewed in favour of “star” bankers, and the incentive for talented junior bankers to prove their ability quickly is further amplified by “up or out” promotion policies,’ said Professor Morrison. ‘Unproven but talented bankers are therefore incentivised to signal their ability through actions that may not best serve their clients and, in so doing, they undermine the institutional reputation.’

It’s not difficult to identify instances in the financial markets in which a banker’s actions might be interpreted as driven, at least in part, by an interest in signalling his or her ability. In one of the many high profile cases from recent years one trader claimed that he concealed a fraudulent trade to ‘augment his reputation and increase his performance-based compensation.’

The challenge to investment banks is to better align ‘the short-term benefit of being perceived as attracting and developing talented employees and the long-term benefit from being perceived as sustaining a culture in which the client’s interest is protected from the incentive distortion facing unproven but talented employees,’ says Morrison.

One solution is to skew the compensation towards senior bankers, weakening the incentive for juniors to take actions that are not in the clients’ best interest. Even here banks need to strike the right balance – set the compensation too high and they run the risk of senior bankers overlooking any potentially high-risk actions of the new recruits if they may personally benefit from them in terms of performance related remuneration.

Another way to tackle this problem is to work very hard to recruit only the most talented people. When investment bankers are already perceived to be very able, their incentive to take damaging actions to signal their competence is reduced.

The paper can be found here: http://dx.doi.org/10.2139/ssrn.1800752

For more information or to speak with Professor Morrison please contact the press office:

Clare Fisher, Head of Public Relations, Saïd Business School
Mobile: +44 (0) 7912 771090; Tel: 01865 288968
Email: clare(dot)fisher(at)sbs(dot)ox(dot)ac(dot)uk

Josie Powell, Press Officer, Saïd Business School
Mobile +44 (0)7711 387215, Tel: +44 (0) 1865 288403
Email: josie(dot)powell(at)sbs(dot)ox(dot)ac(dot)uk or pressoffice(at)sbs(dot)ox(dot)ac(dot)uk

Notes to editors

About Alan Morrison

About Saïd Business School
Saïd Business School at the University of Oxford blends the best of new and old. We are a vibrant and innovative business school, but yet deeply embedded in an 800 year old world-class university. We create programmes and ideas that have global impact. We educate people for successful business careers, and as a community seek to tackle world-scale problems. We deliver cutting-edge programmes and ground-breaking research that transform individuals, organisations, business practice, and society. We seek to be a world-class business school community, embedded in a world-class University, tackling world-scale problems.

In the Financial Times European Business School ranking (Dec 2013) Saïd is ranked 12th. It is ranked 13th worldwide in the FT’s combined ranking of Executive Education programmes (May 2013) and 24th in the world in the FT ranking of MBA programmes (Jan 2013). The MBA is ranked 5th in Businessweek’s full time MBA ranking outside the USA (Nov 2012) and is ranked 5th among the top non-US Business Schools by Forbes magazine (Sep 2013). The Executive MBA is ranked 23rd worldwide in the FT’s ranking of EMBAs (Oct 2013). The Oxford MSc in Financial Economics is ranked 6th in the world in the FT ranking of Masters in Finance programmes (Jun 2013). In the UK university league tables it is ranked first of all UK universities for undergraduate business and management in The Guardian (Jun 2013) and has ranked first in nine of the last ten years in The Times (Sept 2013). For more information, see http://www.sbs.ox.ac.uk/


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Josie Powell
University of Oxford
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Clare Fisher
University of Oxford
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