Some will remember the phrase "Academy Companies" that was used to describe organizations that would be places to poach top performers from because they spent time and money developing their talent from within. The most famous of the bunch was GE. These companies were not doing anything new; they were just the last ones to be using the practices developed in the 1950s to manage their talent rather than trying to fill jobs from outside.
In the world of finance, the big investment banks have played a similar role—not because they spent time and money developing their new hires as much as because they at least made a routine of hiring straight out of college and giving those new hires work experience. According to Wharton MBA students who started in such banks, the experience was generally miserable: ridiculous hours and pressure, little if any help, and so forth. But it was experience, and because so many new graduates wanted these entry-level roles, the people who were selected were seen as special.
Other financial institutions figured this out some time ago, especially private equity (PE) firms, which have been growing and can be quite lucrative. It is not surprising that they started to hire away the “junior analysts” from the investment banks. That junior analyst role had been a four-year assignment, but as a result of this poaching, it rarely lasts that long.
A more recent development is that PE firms offered junior analysts jobs but then wanted them to stay with their investment analyst jobs in the banks in order to pick up enough experience to be useful to them. Now, PE firms are offering the junior analysts jobs even before these graduates start working for the investment banks, the Wall Street Journal reports. Think of it this way—as some people in PE do—as buying futures on young talent.
This is quirky, isn’t it? For the investment banks, it’s not just hiring employees who employers know will be leaving in a year or two. It is hiring employees who are only there to acquire knowledge that’s useful to another employer with whom they already are engaged.
Some legal-minded colleagues when they learn about this are probably thinking about the common law obligation called "the duty of loyalty," which roughly states that employees have a duty to not have conflicts of interest with their work for their employer. An accountant working for an accounting firm should not be preparing taxes on the side for people who are not clients of their firm. This concept no doubt comes as a shock to those in a world where the idea of a "side hustle" seems something admirable, but it nevertheless remains a legal requirement.
Now, for investment banks, what should they do about this? One might say: What’s the problem, they are hiring great candidates who work incredibly hard, they leave, and then new ones are hired? One new development is that the PE firms are now so big and hire so many people that they could take away all the junior analysts from the major investment banks. Another factor is that these almost dual employees have a conflict of interest: Are they spending their energy focused on their current role or on learning what their next and more permanent employer wants? Do they care much about the needs of their current employer and are doing a good job here knowing that they have another job waiting as soon as they leave? Are they now leaving too soon before they become useful?
Here are my bets as to what will happen. The investment banks hope that the threat of PE firms falling out of favor with them (and they are grumbling) may cause some of them to back off. I don’t think that will work. Threatening legal action against the PE firms is possible, but also expensive and cumbersome, given how widespread the practice is. Slapping non-compete agreements on new hire junior analysts to keep them from leaving is an obvious approach, although I suspect no bank wants to be the first one to do this as it will make their jobs less desirable and hurt their recruiting. The PE firms should actually like this move as they don’t want to offer jobs years in advance. It is only the competition for talent that has moved hiring earlier.
The broader issue is that the experience in banking mirrors a national issue. All employers want to hire people who have already had job experience in their fields, and no one wants to give them that initial experience. The unemployment rate for new college graduates is now twice as high as it is for experienced graduates. No solutions are in sight there.
Peter CappelliGeorge W. Taylor Professor of ManagementDirector - Center for Human Resources for the The Wharton School