Competition in recruitment tightens as economy slows

The head of global financial services at one of the largest search firms says: 'Some of the big investment banks are in serious retrenchment mode and there is more to come. If top performers haven't had their compensation drop below the 1999 base, the only way for the institution to survive is to get rid of more people.'

Andrew Lowenthal, global head of financial services at search firm Egon Zehnder in London, says: 'At the simplest level, headhunters admit that people are still being paid far too much. If you cut more and more people to keep level with earnings, you will get to a level that is not operational. We are going to need a significant rethink of the payment culture in investment banking.' Of course, since most headhunting fees are based on the size of the compensation package, that would not necessarily be good news for the recruitment industry.

There continues to be some hiring to fill geographic or strategic vacancies. The mid-tier European banks have benefited from the widespread redundancies at the top institutions and have been active in snapping up good people.

But as one veteran headhunter puts it: 'The second-tier firms over-pay, relatively speaking, for their strategic hiring and taking advantage of an opportunity to upgrade their teams. To some extent it's a gamble. At this stage either they do that or get out of the business.'

Over-paying may attract the right person, but it won't necessarily keep him or her in place if the markets pick up. Russell Reynolds' Pauline Lafferty says retention issues are more important than ever for both institutions and candidates. Amid general nervousness, headhunters are finding the candidates as hard to persuade as the mandates are to obtain. 'There is a high value in staying where you are at the moment,' says Lafferty.

The investment banks are finding they have to wrestle with several issues at once - compensation, redundancy and overall strategic direction. The varied nature of their reactions has sent headhunters into a tailspin as they try to assess their clients' next move.

While HSBC and ABN Amro decided to pay 'zero' bonuses to most of their investment banking staff, others, such as Commerzbank, have closed divisions while Dresdner Kleinwort Wasserstein is looking at an integrated capital markets platform.

Hans Horn, head of the European financial services practice at Egon Zehnder in Amsterdam, says: 'The financial services industry suffers in certain areas from a serious structural overcapacity - it may be 20%, or even 30%. This may seem a wild statement, but it needs real consolidation and structural change.'

He says this is clearly recognised by the top players in the market but not necessarily by the second or third tier players, which are still hiring under the premise of upgrading their staff and in the hope of a rapid rebound in the financial markets.

Hiring in the German, Italian and French markets has also continued, at least in some specialised areas. The Rose Partnership, for example, says that since 1996 its geographic coverage has been 56% in the UK, 21% in Germany, 9% in France, 6% in Italy, 3% in Switzerland and 1% in the emerging markets. However, says Heather Kleeman, the new managing partner, statistics for this year alone would represent more of a continental spread.

James Hickman, partner in the financial services practice at Russell Reynolds in London, says: 'Across the board the European institutions have been active in the securitisation market, credit derivatives and collateralised debt obligations (CDOs). Asset-backed is still strong, and so is the interest rate derivative market.'

Many of the bankers being hired by the European banks are those returning from the US or UK, where employment laws do not offer them as much job security as they can get at home. But this spate of appointments does not necessarily imply buoyant European markets, says Hickman. 'Institutions become intoxicated with their sudden ability to hire these people, but they will have aspirations that need to be met,' he says.

However, in some markets, such as Italy and Germany, there is also an appetite for investment banking talent from the non-banking world. Alberto Gavazzi, head of financial services recruitment at Russell Reynolds in Italy recently told Financial News that some of the younger Italians were moving out of investment banking. He says: 'Bright young investment bankers are in demand for strategic planning and financial roles reporting directly to the chief executive in Italy's middle market companies.'

Compliance roles and those in risk remain strong, with financial institutions beginning to identify different sorts of risk in these markets. Simon Fenton, who leads the European financial services practice at Spencer Stuart in London, says: 'Asset management companies are much more cognisant of risk, and as they compete with hedge funds, they are acknowledging that it creates new levels of risk.'

Headhunters are cagey about hiring trends in debt, and say the market could go either way. While debt specialists had high expectations going into compensation reviews, they came out a lot more sober, say consultants, and this year will depend very much on what happens in the business. However, they point to the increasing emphasis on 'super-originators' and say there is a great deal of talk about 'bringing in rainmakers'. Increasingly, managers tend to try to differentiate among staff, identifying individuals as 'journeymen' or as having 'star mentality', say headhunters.

Another area in which compensation is at the forefront of internal discussion is private banking or wealth management where there is still considerable variation in pay across geographic sectors. This is a market currently glutted with headhunters, many of whom moved in during the first signs of a downturn in the hope that here, at least, there would be rich pickings.

James Marlar, a headhunter who last year launched a wealth management search firm under the umbrella of Marlar Bennett, agrees that, in retrospect, the timing was unfortunate. Over the past six months, some 50% of his work has been in research into compensation in private banking.

He says: 'One of the issues that has arisen through the acquisition of teams is the creation of playing fields that are not level. In the hurry for teams there has been a lack of consideration as to the effects of such hiring.'

Marlar gives an example of a bank that hired a team of new recruits, all of whom came in with cash and pure equity in the business. The people who already worked there, however, only had options - and the end result was very divisive. Institutions are now paying well for reports on alternative compensation methods - and what their competition is doing.

For the recruiters in financial services, specialised knowledge remains crucial to getting the business at a time when clients are in no mood to discuss fees or guarantees.

'There is a lot of chasing around for business, with headhunters approaching clients and saying we know you're looking to fill this position and this is why you aren't going to succeed. Everyone is chasing everyone else, and it is getting very messy indeed,' says one headhunter.