What Drives Sell-Side Analyst Compensation at High-Status Investment Banks?

TLDR

The study investigates factors linked to analysts’ annual compensation using proprietary data from a major investment bank. The authors analyze compensation data from a major investment bank and replicate the analysis with a second high‑status bank to test generality. Compensation is positively linked to All‑Star recognition, investment‑banking contributions, portfolio size, and top stock‑picker status, but not to earnings‑forecast accuracy; turnover correlates with forecast accuracy, indicating termination‑based incentives, and overall compensation rewards activities that boost brokerage and investment‑banking revenues, findings replicated in a second high‑status bank.

Abstract

We use proprietary data from a major investment bank to investigate factors associated with analysts' annual compensation. We find compensation to be positively related to "All-Star" recognition, investment-banking contributions, the size of analysts' portfolios, and whether an analyst is identified as a top stock picker by the Wall Street Journal. We find no evidence that compensation is related to earnings forecast accuracy. But consistent with prior studies, we find analyst turnover to be related to forecast accuracy, suggesting that analyst forecasting incentives are primarily termination based. Additional analyses indicate that "All-Star" recognition proxies for buy-side client votes on analyst research quality used to allocate commissions across banks and analysts. Taken as a whole, our evidence is consistent with analyst compensation being designed to reward actions that increase brokerage and investment-banking revenues. To assess the generality of our findings, we test the same relations using compensation data from a second high-status bank and obtain similar results.