A few years ago, Boris Groysberg conducted a study of 1,052 ‘star stock analysts’ from 78 U.S. investment banks between 1988 and 1996. Stars were recognized for their superior performance and perceived as key assets. However, his findings revealed surprising outcomes when stars switched employers:
Decline in individual performance. Stars’ performance dropped sharply after moving to a new bank, with 46% performing poorly within the first year. Their output declined by an average of 20%, showing no real recovery even five years later.
Team disruption. The presence of a new star hire can lead to interpersonal conflicts and overall team demoralization.
Negative impact on valuation. Star hires tend to erode shareholder value. Groysberg found that announcements of individual star hires led to a 0.74% decline in stock prices, costing banks an average of $24 million per star hire (i.e., between 1988 and 1996).
Banks often underestimate how much a star banker’s success depends on their prior organization’s assets. Key factors identified in my own empirical study on investment banking excellence include:
Routines, habits, procedures, and systems. Team-based mentoring processes, effective investment and compliance committees, a collaborative business culture, and technological novelties play critical roles in supporting the star’s performance.
Managerial support. Executives and managers allocate, lead, and prioritize (e.g., investment banking versus trading), which is essential for stars to thrive in a high-octane environment. Clarity is key. Do superiors really understand how to inspire and leverage the distinct qualities of stars, or not?
Prominence and status. The bank’s brand name, professional legacy (barriers to entry for the elite are high), and the reach and richness of its networks make it easier for stars to focus on what made them a star; a star’s ‘freedom to perform’ is actually a byproduct of a heavy, efficient bureaucracy behind them.
Collaborative networks across the bank. Individual stars profit from a trust-based environment, fueling a collaborative infrastructure. As Goldman Sachs’ former chief, John Whitehead, emphasized, “At Goldman Sachs, we never say I.”
Hiring stars is definitely not the industry’s Rosetta Stone. Excellence is not a portable commodity but an organic byproduct of a specific ecosystem. However, for decades, European and Asian banks attempted to enter the U.S. market through ‘buying’ stars from incumbent players, sometimes even complete investment banks. The final result was financial disaster in virtually all cases. Most investment banks want the trophy of the star, but refuse to build the gym where stars are actually made. That sounds simple, but in practice, few firms understand that the success of weightlifting is lifting a lot of weights, persistently and systematically.
More details: www.pieterklaasjagersma.com/reports.