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The Casual, Coddling, Brand-New Corporate Culture of Wall Street

First Merrill Lynch & Co. canceled the free lunches it traditionally had doled out to its deskbound traders and salesmen. Then Lehman Brothers followed suit.

It was the fall of 1994. After a rough year, financial market prospects looked bleak. And though the mealtime savings were small, the symbolism was not. Wall Street, it seemed, had finally gotten religion—or at least what passed for management science. Gone were the last vestiges of the old culture at two of the most paternalistic holdouts. A new era of bottom-line, shareholder-focused discipline had dawned.

Click on the year 2000. In December Merrill Lynch will cut the ribbon at a new state-of-the-art fitness center on the ground floor of its World Financial Center headquarters. Lehman Brothers is flying its junior bankers business class on coast-to-coast trips and offering more money for meals with colleagues. Meanwhile, J.P. Morgan offers stressed-out employees three free sessions of psychological counseling (by either phone or office visit), provides massages at its gym and is trying out a fancy concierge service that will arrange to pick up the dry cleaning, plan parties and even wait for the cable guy.

So much for discipline in high finance. Wall Street houses that had clung to their bottom lines like a day trader to his mouse now race to outdo each other in serving up the most delectable menus of benefits and perks. Salomon Smith Barney is considering building nap rooms for late-working bankers. Bear, Stearns & Co., that bastion of bootstrap, rawboned capitalism, will have a coffee lounge, complete with television, on the 19th floor of its New York offices. And, yes, free food is making a comeback. Credit Suisse First Boston serves up cafeteria eats in the evenings, gratis. This spring Goldman, Sachs & Co. began dispensing fruit and sodas all day long; archrival Morgan Stanley Dean Witter soon did the same (substituting coffee and hot chocolate for the sodas).

Thank the now-flagging dot-com mania for inspiring these changes. Last fall Wall Street's top executives suddenly discovered that in a roaring economy, they were no longer the employers of choice. Senior bankers were being enticed away by Internet start-ups, and, even more disturbing, the pipeline of business school students and talented college seniors was drying up.

In 1994, 19 percent of Harvard Business School's graduating class chose investment banking; by last year that figure had fallen to 12 percent. The destinations of choice? Dot-com start-ups, other technology highfliers and the venture capital firms financing them. At the time, many business students viewed investment banking with indifference or disdain: Why join a bank in the midst of what is arguably the greatest entrepreneurial wave in history?

"Look at the options these students face," says Bill Brady, head of global corporate finance for the CSFB Technology Group. "If the start-up works, they make more money, they get to work with a bunch of people their own age, and there's a lot less hierarchy."

That was before the spring swoon of Nasdaq stocks. Yet Wall Street is still laying on the perks and plumping up the pay. Why? Managers insist it's an overdue shift in operating style in keeping with a softening of corporate cultures throughout the U.S. And just about everyone is convinced, Web flameouts notwithstanding, that the underlying technology revolution transforming business practices has a long way to run.

"At the senior level of virtually every professional services firm, there's a fundamental shift in the amount of time taken on human capital," says Thomas DeLong, a Harvard Business School professor of management who worked at Morgan Stanley in the mid-1990s and has consulted for many major investment banks. "The changes we see are not just form—they have substance."

Clothes don't make the management, of course, but nothing is more emblematic of this new approach to the care and feeding of employees than the relaxed dress codes that make even the august dining rooms of some Wall Street firms look more like college cafeterias or the 19th hole of the country club. Once J.P. Morgan broke the barrier on February 7, allowing its bankers to wear "business casual" year-round, just about every major firm quickly followed, well, suit.

Employees don't even have to pay retail, as firms pull out the stops to make themselves over, at least in appearance, as the kind of New Economy outposts that everyone wants to work for. Bear Stearns has arranged discounts with casual clothiers like J.Crew and Eddie Bauer. Goldman Sachs has negotiated employee markdowns on stylish Kenneth Cole shoes. Bankers may still have to wash their own chinos, but not necessarily at home—so-called concierge services, which will find everything f rom a dry cleaner that delivers, to a poodle groomer who makes house calls, have become almost de rigueur at New York investment banks in the past year.

Senior bankers have long been pampered. What's new is the proliferation of goodies streaming down to the 20-something analysts and associates—the privates and corporals in the great armies of banking—who labor through the night making the transactions happen."It's been one good thing after another," chortles an associate at a top in vestment bank.

No fooling. The rewards go well beyond creature comforts. This spring all firms considered hiking their base pay for analysts straight out of college from $40,000 to $50,000 per year. Then one firm went to $55,000, and the rest followed. (All in all, with bonuses, these 22-year­olds can expect to make $70,000 to $80,000 in their first year.) With an MBA, first-year associates can make $150,000—$15,000 to $25,000 more than in 1999; third -years, a stunning $400,000 to $600,000. Goldman Sachs put aside 2 million shares, worth more than $200 million, that will be awarded to 8,000 junior-level employees, while one firm after another has made it easier for its underlings to participate in venture capital and other private equity funds that, just a short while ago, were the exclusive perk of senior bankers.

Does all this largesse make business sense? Ultimately, investment banks are only as good as the people they have pitching deals, structuring securities and trading positions. And as firms have transformed themselves from parochial partnerships to global behemoths in less than a generation, they've never needed to recruit—and to retain—top-notch employees so badly.

"A 15-year career on Wall Street is long, so you need to continue to get fresh talent," says Hans Morris, co-head of the global financial institutions group at Salomon Smith Barney, which now fields 700 analysts and 400 associates worldwide in its investment banking business.

High rates of turnover can be deadly, and recruiting has never been more expensive. CSFB equity trading chief Michael Clark estimates that his firm spends about $1 million per year in compensation, overhead and support for every new banking and trading hire. "It's a good thing we've had to do some soul­searching on how to attract a good employee and how to retain that employee," says Clark. He adds, a little wistfully, "It would be helpful for the recruits to think about what they owe the firms, as well."

There's no question that Wall Street needed to refine its people skills. Traditionally, all but star performers were expendable—just another variable cost to be cut when markets cratered. The first to go: the hardworking grunts, without whom there would be no pitchbooks, no spreadsheets, no PowerPoint presentations and no one to pay the pizza deliverymen at midnight. Indeed, junior bankers have generally been treated very much like pizza delivery men. "At Lehman Brothers you were a serf until you were a partner," recalls Peter Solomon, who ran investment banking at that venerable firm and now has his own investment banking boutique, Peter J. Solomon Co.

In 1994, as the bond markets tanked, Wall Street slashed ferociously, eliminating car service, first-class air travel—and thousands of jobs. Some firms even pulled offers they had made to B-schoolers. The result: badly damaged employee loyalty, a bench depleted of talent and a new wariness among business students. "In 1994 firms violated their commitment to employees by making short-term decisions," says Harvard professor DeLong.

Now the firms are trying to overcome this legacy, while coping with a whole new set of workplace challenges. Wall Street CEOs are showing their softer sides. Last month J.P. Morgan CEO Douglas (Sandy) Warner III held a town hall-type meeting in which employees were encouraged to pass along ideas and gripes directly to him; he plans to repeat the exercise. All the rage are career development programs like the one slated to begin next month at Morgan Stanley: Every analyst and associate will be given a senior officer as a mentor. "I read in The Wall Street Journal that investment banking is back in vogue," says Robert Jones, vice chairman of investment banking at Morgan Stanley. "We're a long way from that, but people are realizing that Wall Street is a better place to work."

For all the well-intentioned gestures and high-minded talk, many veterans doubt Wall Street will ever really change its pinstripes. In times of plenty firms simply can't help but spend. Says Solomon: "Wall Street has made so much money that they have no idea what they are doing. All they want to do is keep the dance going. If it means paying more, doing their laundry or dressing casual, they'll do it."

But at the first sign of a serious, prolonged downturn, say skeptics, investment houses will revert to their old ways and send their bankers packing. "The social contract on Wall Street? The reason we pay you so much during good times is that we reserve the right to fire you in bad times," says William Benedetto, chairman of Benedetto, Gartland & Co. "My prediction is that in two years, they'll be back to suits. They won't rescind the perks, they'll just go away. They'll be looking for ways to cut costs, and they'll see the concierge, and they'll yank it."

Adds veteran Harvard Business School professor of investment banking Samuel Hayes, "Only the gullible will fall for the idea that this is a sea change in Wall Street management."

WALL STREET LOVES TO KEEP SCORE. A BANK'S ability to attract Ivy League hockey captains, the scions of billionaires and Harvard Business School's Baker Scholars has long been an important measure of its standing, as well as a decent gauge of its future prospects. After all, some of today's young bankers will be tomorrow's rainmakers.

Investment banks have thus spent an inordinate amount of time filling their benches. "Nothing is more important to Wall Street than recruiting," says Michael Pettis, head of capital market strategies at Bear Stearns. "For ego, sentimentality, interfirm rivalry."

Through the 1980s and 1990s, elite firms like Goldman Sachs and Morgan Stanley had little problem attracting the cream of the MBA crop. Prospective candidates swarmed recruiting dinners and receptions at hotel ballrooms and posh restaurants. The appeal reached down to the undergraduate level: In 1985 one third of Yale University's graduating class famously applied for analyst positions at First Boston Corp.

The more intellectual student might have opted for a position at McKinsey & Co., and the hot boutiques of the year, like Wasserstein Perella & Co., would have grabbed their share of top candidates, but for the most pan the top-line banking firms were left to slug it out with each other for the best talent. Dot-coms didn't exist, and venture capital was still an adventure, not the sure thing it briefly seemed a few short months ago. "There were only three or four venture capital firms on campus," recalls Thomas Weisel Partners' David Crowder, one of the 835 students in the Harvard Business School class of 1993. "Only 20 to 25 of my classmates went to private equity."

That changed last year. When they showed up on campuses, recruiters for investment banks soon found they had a problem. Summer associates were turning down offers in high numbers. Reports of sparsely attended recruiting receptions, even those featuring CEOs, swept the Street.

"This year we had to pro-actively seek candidates," says the head of recruiting for the equities group at one of the largest investment banks. ''At Wharton and Columbia, it was rough to fill one schedule, when it used to be we could fill two or three."

Firms pursued their picks even harder than usual. According to one Harvard MBA whose Wall Street experience consisted of a summer internship at a second-tier bank, Lehman Brothers called him up to six times a day for three weeks. "I started screening my calls," he says.

B-school students became emboldened, even obnoxious. One job candidate at Harvard Business School cut off a Merrill banker in midsentence: "You're not interviewing me," he said. ''I'm interviewing you. I have a business plan, and I'm going to be looking for a banker soon."

Banks hope to produce the perceived advantages of the dot-com world: equity options, flexible work schedules, nonhierarchical management and worker-friendly environments. "There used to be a trade-off between making money and doing cool and creative work," noted a Columbia Business School student earlier this year. "That doesn't exist anymore. Now you can make a kazillion dollars and be artistic. If you don't, you're kind of a loser."

This spring that 30-year-old Columbia graduate (who had worked as a junior banker for five years before business school) had offers from four major Wall Street firms, two Internet companies (dangling CFO tides) and two venture capital firms. After the dot-com market shook out, he accepted a job as a technology banker and then switched to an emerging-markets venture fund.

The difficulty of dealing with such picky prospects sent shivers through Wall Street firms, whose recruiting needs have skyrocketed as they have become global enterprises. Last year, as deal flows soared, the banks had enormous appetites. J.P. Morgan doubled its associate class for 2000, while its analyst class grew by 50 percent. Salomon Smith Barney hired 50 percent more MBAs; CSFB doubled its summer associate hires, and DLJ's associate hires rose by about one third.

In the end, the firms more than managed to fill their rapidly expanding ranks. They redoubled their efforts and spread their nets wider, hiring from the likes of Vanderbilt University and the University of Western Ontario, places that had not previously been considered prime fodder for Wall Street.

Recruiters found a potent supply of candidates among veterans of the armed services and have turned their attention to law schools, as well. Always eager to see the glass as half full, bankers have taken to describing this minishift away from Harvard, Stanford University and the Wharton School as a welcome move toward diversity.

But Wall Street executives also got a major boost when technology stocks began falling sharply in March. With many newly public Internet start-ups burning through cash at alarming rates and several heavily hyped companies, such as online fashion retailer, shutting down, the capital markets slammed the door on most Internet financings. Many B­schoolers began pulling offer letters out of their trash cans, and the recruiting market began to ease a bit.

"It's been nominally easier since the correction," says Weisel partner Crowder. "A lot of people are reassessing their risk profile. They are calling us, returning from dot-com land, or they considered it and now want to participate in that part of the economy without all that risk."

"By April 15 I still had a lot of business, but I had fundamentally different people needs," says CSFB's Brady. "Three months ago we would have done everything we could to keep someone. But now we are taking a harder line on those who leave."

Nevertheless, Wall Street got a taste of being second-best that many say won't wear off with the Internet fallout. Says Daniel Bayly, head of investment banking at Merrill Lynch: "Recruiting talent is increasingly competitive, and a greater percent of the students are going to entrepreneurial enterprises. I don't expect that to change back quickly. But I still expect that a large number will go into banking as well."

The Internet slowdown is, of course, a two-edged sword. Dot-com companies may not be siphoning off so much talent, but the deluge of Internet financings and trading has played a major role in Wall Street's prosperity over the past few years.

EVEN AS WALL STREET FIRMS were engaged in thankless recruiting efforts, they found themselves having to do battle on the retention front, as well.

Junior and senior investment bankers began ditching big firms for dot-coms and venture outfits. Most perplexing was that many were leaving for reasons that went well beyond money. After all, as a group they were already extraordinarily well paid. Some were looking for a lifestyle change, others for a more entrepreneurial challenge. In May 1999 James Carroll, a senior managing director in the media and entertainment group at Bear Stearns, jumped ship to become the CEO of In February 2000 Citigroup CFO Heidi Miller left to take the chief financial post at In April William Reid, former co-head of Citi's financial sponsors coverage group, departed to become vice chairman of, a company offering private equity over the Web, and DLJ's head of global research, Susan Decker, threw in the towel and took the CFO job at Yahoo!.

Junior-level investment bankers were walking out the door, as well. Departure rates at investment banks rose from 15 percent a year in 1999 to a recent 25 percent, says Alan Johnson, head of executive compensation firm Johnson Associates.

Says Morgan Stanley investment banking vice chairman Jones: "All of us on Wall Street took our eyes off the ball, and we lost a lot of talent to the likes of Microsoft and Cisco Systems as well as other Internet companies. The method to the madness is to create a long-term career model for junior-level people."

In January, Jones says, Morgan Stanley formed a task force to find out what changes could be made to make the life of the financial analyst "as attractive as it could be." In May the bosses rolled out the perks, which include a monthlong vacation for analysts promoted to associate and subsidized memberships at Equinox, an upscale New York gym. In addition, senior investment bankers must now keep close track of the work their junior employees are asked to do on weekends. If the overtime seems excessive or frivolous ("Fax me the papers at the beach"), the senior bankers can be held accountable.

Elsewhere on the Street, analysts were also in the spotlight. In April a Salomon Smith Barney analyst made news with a lengthy memo he had written outlining some gripes that had led to a "record number of departures of analysts within the past year." The memo raised some philosophical concerns: "The general perception of analysts as inferior creatures only invites further abuses." And it offered practical recommendations: "Showers or a nurse room with a bed or a rec room where we can relax when things get crazy or sleep when forced to spend the night."

Salomon agreed to many of these changes but was chagrined that the memo was leaked to the press, where it was played up as the revolt of the Wall Street underclass. The analyst was nicknamed Spartacus.

"We knew we needed to rethink the workplace," says Salomon's Morris. "We solicited the memo in anticipation of an off-site meeting at the end of March. These demands are not much different than 1982, when we talked about getting computers on every desk, institutionalizing dinner policies and cab vouchers. It's reached a higher level, and there's a certain informality of the business culture."

That informality has been enshrined in looser dress codes. One great irony of the decision to go casual is that it has led to a whole new set of rules. "We do not intend to be the 'fashion police,' but many people have asked for guidelines," Credit Suisse First Boston noted in a directive that proceeded to lay out what was appropriate (chinos, for example, and "clean neatly pressed clothing without obvious rips and tears") and inappropriate (flip-flops, bare midriff outfits and micro miniskirts).

The rationale behind CSFB's decision to go casual, CEO Allen Wheat noted in a March 27 memo, was that many employees "feel you can be more productive when you are more comfortable." Plus, firms want to dress more like their diems (not that many corporate executives ever looked like Gordon Gekko, the 1980s' caricature of a suspender-snapping banker).

Wall Street is facing a fashion challenge, since not everyone has adopted the new code. "Business casual is more complex, and we're seeing that complexity,'' says Morris. "Is a guy going to be wearing a Planet of the Apes T-shirt or a $400 cashmere swearer?" And one woman's casual isn't always another's. At Morgan Stanley hosiery is required at all times. "You might as well not have a policy," says one woman. "You cannot be casual in pantyhose."

Predictably, some veteran bankers are howling—in protest and derision. "I hate the decision to go casual. It's ridiculous. You hear men asking each other what they are planning on wearing to meetings," says Soloman Co.'s Solomon.

Adds Benedetto: "You get in these big meetings, and one third of the guys are in business casual, one third are in sports jackets, a couple of guys are in suits, and a few are in T-shirts. There's an incredible awkwardness to it. No one really knows what to say."

Along with the new dress code, Wall Street firms are trying to make life more comfortable for their hardworking crews. In an April memo entitled "Making CSFB a Better Place to Work," Wheat announced new benefits that include flexible hours, paternity leave, paid leave for promoted analysts, sabbaticals and evening cafeteria hours. "Considered one by one, they appear to be 'nice to do' things; taken together, they demonstrate our commitment to recognizing our employees' needs," wrote Wheat. "They represent the first in a series of innovative practices that we will develop over the coming months."

Hardly an innovation, but welcome nonetheless: bigger paychecks. The salaries of star bankers and analysts have never been higher. Some managing directors in Merrill's M&A group are receiving three-year guarantees for about $5 million annually, according to well-placed executive recruiters. In March 1999 Warburg Dillon Read lured health care analyst Benjamin Lorello away from Salomon with a three-and-a-half-year package worth $70 million. First-year vice presidents at DLJ are reportedly guaranteed $1.2 million to $1.5 million over two years.

For the first time this sort of serious Wall Street money is flowing down to the associate level, in traditional bonuses and in new, Silicon Valley-like investment plans. Most banks have done something. In June CSFB announced a generous, $250 million to $300 million "wealth accumulation plan" that gave associates and vice presidents stakes in private equity and risk capital investments run by the firm. CSFB puts up the investment money, the bankers receive annual payments from profits, and the firm eats any losses. DLJ has created similar New Economy private equity vehicles for junior-level employees. Lehman Brothers set up "partnership accounts," where the bank pitches $30,000 a year per analyst ($50,000 for associates) into a private equity fund. In three years the employee gets the gains.

These new programs come on top of an already enormous rise in compensation for junior bankers. "You used to hear about associates making $250,000 or $300,000—now it's $650,000 or $700,000 guaranteed for two years because they worked in the San Francisco office for two years," says executive compensation expert Johnson.

But money doesn't guarantee job satisfaction. "People hate what they do," says Johnson. "The work's boring. How do you make the work more interesting and people care? Historically, Wall Street hasn't cared. Senior partners didn't want change: they'd paid their dues and wanted others to do the same."

Such senior bankers aren't the kind of mentors that Wall Street executives believe can play an ever-bigger role in motivating individuals and giving them a greater sense of how to build careers within their firms. Throughout Wall Street, banks are formalizing mentoring programs. "There used to be a lot of lip service to this," says one Morgan Stanley banker. "Now the word is out that it's a priority." Adds Robert Kaplan, co-head of investment banking at Goldman Sachs, "While our culture has always emphasized mentoring, coaching and teamwork, in the last several years, we have put much more structure and accountability in place, in addition to the informal relationships we always stressed."

FLUFFING UP THE SOFT SIDE OF BUSINESS IS, let's face it, a lot easier when times are flush. The question is whether Wall Street will still be so committed to its bankers' welfare in darker days.

By any measure these are extraordinarily prosperous times. Consider that the average return on equity for large investment banks in 1999 was 28 percent, compared with the 21 percent annual average of the past five years, according to the Securities Industry Association. The first quarter of 2000 defied all expectations: ROE hit 44.1 percent.

But costs are rising, too, though so far this has been camouflaged by the remarkable business environment of the past few years. DLJ brokerage analyst Joan Solotar noted in an April report that firms were under pressure to "pay up" for talent. "Why hasn't any of this shown up in the compensation­to-net-revenue calculation?" she wrote. "Because top-line growth has been incredibly strong. However, we expect the pressure to increase this year."

The pressure may be felt soon.

In July Merrill Lynch reported that second-quarter earnings increased a healthy 34 percent year over year. But during the same period, compensation and benefits rose 26 percent. That puts compensation and benefits as a percentage of net revenues at 51 percent for Merrill, compared with 50 percent at Goldman Sachs and 44 percent at Morgan Stanley.

Merrill, in part to boost its ROE to the 18 to 20 percent that it has promised shareholders, recently acknowledged plans to cut 1,800 jobs in its sprawling brokerage group. This raises a potentially thorny issue for a firm that has always stressed a caring culture: How do you shell out for a brand-new gym while a couple thousand employees are packing to leave?

Should the markets drift or plunge into a prolonged slump, the question may prove very easy to answer.

But, says CSFB's Clark, "we have started to realize that there's more to life than creating another dollar, that self-esteem and family issues and geography really matter. Will it last? I don't know."

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