Prospects shrink with more job and pay cuts expected

The need for further downsizing was made apparent by a slew of recent results from investment banks. At Morgan Stanley, profits were down by 14% in the second quarter due to a sharp fall in all areas of its investment banking business.

Lehman Brothers saw revenue from the majority of its bigger business lines decline, while Goldman Sachs reported a sharp fall in earnings from its equities business and a slowdown in underwriting. Only Bear Stearns released positive second quarter results thanks to a strong performance in fixed income and an improvement in the equities and investment banking divisions.

But if industry watchers no longer have the confidence to speculate on the number of job losses to come, they agree there are more in the offing. The next round of job cuts is expected at the end of the summer, say headhunters.

At financial services search firm Armstrong International, Aidan Kennedy, head of research, has been compiling an annual compensation report for the industry, based on discussions with eight of the leading investment banks.

He says: "The end game in investment banking seems to be 400 bankers on average in the M&A and ECM groups combined. Conversations with HR directors and heads of investment banking yield this number."

But out of all the important investment banks, only Goldman Sachs and Credit Suisse First Boston (CSFB) are close to this number, says Kennedy.

Goldman Sachs just cut another 1,000 jobs in the second quarter and in the past year its headcount has fallen by more than 1,800 as it struggles to bring its costs into line with the downturn in investment banking. Insiders say its investment banking division is still 20% overstaffed.

There is also "a lot of politics out there at senior levels about who is going", according to the head of global financial services of one of the big-brand search firms. And HR departments have been buzzing with the effort of trying to determine an appropriate level of remuneration for those who stay on.

Headhunters are willing to concur that if bonuses were down 40% last year, this year they are likely to be down 40% again for investment bankers. But as Jason Chaffer, head of global financial services for search firm Spencer Stuart in London, puts it: "There is a level of remuneration below which investment bankers will not accept life. I see it as being below 1998 compensation levels."

Informal but urgent efforts are being made at all the leading investment banks to determine what constitutes an acceptable level of compensation, and to manage expectations accordingly. Whereas last year employers began to manage expectations around November or December with dealflow taken into account, this year the process is expected to start at the end of the summer, say headhunters.

The proportion of compensation given as equity, or deferred equity, is set to leap upwards. Whereas last year the equity component of remuneration was between 30% to 70%, this year it is expected to be at the upper end of that range.

Martin Armstrong, founder of Armstrong International, says: "At managing director level, there may be an equity component as high as 80%. So if you make 1m (e1.55m), you get 200,000 in cash and the rest in delayed equity."

Headhunters say Deutsche Bank is one of the institutions that has taken equity components for senior people up to 50%.

Areas other than investment banking have shown considerable hiring activity, which is likely to affect their bonus pools. In fund management, for example, four or five big CIO searches have been conducted recently.

One headhunter says: "There are some pretty generous deals out there in fund management. But some firms have also cut their costs to the bone so if a single person left the firm you would have to replace them from outside."

In specific areas, such as equity research, pay levels have gone up rather than down. In the bulge-bracket banks pay can be as much as $5m for a top-rated analyst and that figure includes stock.

Chaffer says: "These people are expensive and the price for them is not changing. But they do have to be the best."

Bankers with strong industry or product experience have always had the most transferable skills, but their room for manoeuvre in these markets is limited. Another headhunter says: "Telecoms bankers have had to switch to industrials and country bankers have had to become sector bankers."

Where country banking teams used to number eight professionals, now they often have only one senior banker who then has to rely on the sector teams.

Much of the time those bankers who find themselves in sickly sectors stay put unless they are shoved.

Andrew Lowenthal, head of global financial services at Egon Zehnder says: "People are very wary to move jobs at all in these markets. Switching sectors, should they want to do so, ultimately depends on who they are - their training, their background, their flexibility and ultimately their personality."

Personality is sometimes the issue. One headhunter says: "M&A people tend to be expensive and prima donna-ish, which is not a great combination if you need to move in a hurry."

Nor are employers willing to take a chance on moving someone who does not have a track record in a given sector.

Specialists in telecoms, FIG or utilities can explore global opportunities in countries such as China and South Korea, where there is demand for these skills. But there has been a scaling down by banks in these sectors also, and job moves tend to take place by staff being transferred within an organisation, rather than applying externally.

Options outside the financial services sector have also narrowed. Boutique hiring has tapered off in the past few months, and bankers have turned to lateral options such as corporate development work within significant clients, private banking opportunities and the risk arbitrage and M&A arbitrage areas of asset management.

But Kennedy at Armstrong International says: "All these areas are attractive from a lifestyle and pay perspective, but we have found none of these are what we would call healthy hiring markets - it is all a bit of an illusion."

The consensus seems to be it is tough out there and it is going to get tougher still.

Andrea Eccles, managing director of Fairplace Consulting, the outplacement firm, says: "My sense of the mood of the market is that people in existing jobs are staying put. Our retail side, which deals with those making voluntary moves, certainly isn't as busy as it was when it launched 18 months ago - although outplacement is very busy indeed."

There is some expectation among headhunters that there will be exits at senior levels from financial services as equity options vest and people who have already made a pile of money decide to get out. This could clear the way for others who are still fresh to the financial services sector.

Roddy Gow, global head of financial services at search firm Odgers Ray & Berndtson, says: "A large number of younger people are simply shell-shocked by radically reduced compensation - they have not lived through it before."