The counteroffer makes a comeback

Headhunters and banks say this is the year of the counteroffer in fixed income and corporate finance, equities and elsewhere. To prevent staff falling into the clutches of higher-paying rivals, investment banks are tempting them back with substantially higher pay packages.

Tim Sheffield, managing director of the recruitment firm Sheffield Haworth in London, said: "We are seeing a significantly higher level of counteroffers than last year, with many at least 50% higher than the original bid. There is a shortage of talent and banks know they cannot afford to lose staff who are critical to the business."

Ben Dear, a director of Mantis Partners, was even more bullish: "Some people have been tempted to move by packages guaranteeing twice what they earned last year. They then receive a counteroffer from their existing employer, which takes them to triple their original figure."

Headhunters said counteroffers are made possible by the low packages paid to people who have spent the past few years at the same company for fear of moving in a turbulent market. Lee Thacker, head of fixed income at the Whitney Group in London, said: "Lots of people who haven't moved in recent years have fallen behind market rates."

At the same time, there are reports of bonuses guaranteed for the next two and sometimes three years, and of rampant pay inflation for junior staff.

A decision by Credit Suisse First Boston a few weeks ago to guarantee its associates annual packages worth up to $300,000 (€252,000) is irrelevant, according to a London headhunter who focuses on fixed income. "There has been a big increase in pay for associates. Someone doing a good job can now expect to earn $500,000 after a few years."

Sceptics argue that headhunters, who are paid a proportion of the pay packages of the staff they find, have a vested interest in giving job seekers and employers the impression that pay is rising.

However, after several years of famine it is tempting to think that feasting could be back on the agenda, at least for the best bankers. First-quarter results have been impressive with UBS, ABN Amro, BNP Paribas, Merrill Lynch, Citigroup, JP Morgan and Goldman Sachs among those to have published significant profit increases.

The pace of hiring has stepped up. In the past month Bank of America, Merrill Lynch and Morgan Stanley have made multiple appointments to build divisions and headhunters cite groups such as HSBC, Barclays Capital and Royal Bank of Scotland that are developing their businesses.

Search firms say they are benefiting. Sheffield said first-quarter revenues at Sheffield Haworth are double those of last year. John Jessen, a director of Smith & Jessen, a Frankfurt headhunter, said revenues this year have surpassed those of last.

Banks are tight-lipped when it comes to discussing how much they pay their staff. However, Tony Brown, director of staff for Bear Stearns in New York, said: "Substantial counteroffers have become more prevalent on Wall Street in the past few months. One and even two-year guarantees are back in some cases." Other Wall Street banks confirmed the trend.

Alan Johnson, a pay consultant working with Wall Street clients, said: "Pay [in the front office] made a modest comeback last year and could rise substantially this year. It will certainly be up 25% and possibly even more." However, he said banks are far from lapsing into their former extravagant ways. "They are still digging themselves out of a hole. Pay will be nowhere near the peak of 1998 and 1999."

In this climate, Johnson said guaranteed pay packages are much lower than those offered in the boom of the late 1990s. "The guarantees available at present are usually what would have been paid anyway."

Some employees have greater bargaining power than others. In an attempt to rescue vital proprietary traders from the clutches of high-paying hedge funds, headhunters said banks are increasingly prepared to sign contracts committing them to pay staff a percentage of profits.

Although Jessen said guaranteed bonuses have returned in Frankfurt, a pay bonanza has yet to be glimpsed in much of continental Europe. Tracey Turton, a headhunter at Horton International in Milan, said the Italian market remained quiet. She said: "We are only just emerging from recession." Valerie Barthes de Ruyter at Whitehead Mann in Paris said guarantees and counteroffers are rare in France.

Mark Heath, a pay consultant at PricewaterhouseCoopers in London, said banks will have to do some fast talking to depress bonus expectations for this year. He said: "There is a lot of pent-up pressure for higher pay and there is no question that revenues and profits are already looking great."