Higher you fly, faster you fall

Junior investment banking staff are benefiting from some of the fairest conditions for the past few years. But as hiring and pay soar, recruiters and analysts warn the eventual cull could prove all the more savage.

"There's some silly stuff going on, and banks are starting to recognise that," says Alan Johnson, chief executive of Johnson Associates, the Wall Street pay consultancy. "We're at the point in the cycle where people start to get bid up."

The bidding appears particularly frenetic when it comes to junior staff at analyst and associate level, particularly in corporate finance. A recent study by Financial News found nearly 100% of banks planning to hire junior M&A employees in next few months.

Logan Naidu, a consultant at London recruitment firm Cornell Partnership, says the market is already 'toppy,' with banks paying lavishly to recruit and retain juniors.

But Naidu says it is increased hiring rather than rising pay that anticipates the extent of the eventual downturn: "Everyone knows banking is cyclical. Right now, it's just about getting bums on seats and doing the deals. Quality control is already slipping and the more bums that come in, the more will go out again."

Predicting the turning point

Naidu predicts another twelve to eighteen months of recruitment prior to any cull. Johnson says we're currently in the fourth year of a five year investment banking cycle that began in the downturn of 2002. "Pay will turn down and hiring will turn down even faster once the business gets soft," he predicts.

Johnson says the current cycle is different to its predecessors, because having been burned previously banks were initially slow to ramp up recruitment. "This is the third year in a row that business is better," he says. "But it's only now that banks think they have something sustainable and real, that hiring has begun in earnest."

The head of banks research at a European bank says headcount additions are already sufficient to trigger redundancies, however. "Headcount levels today are huge compared to where they were in 2003," he says. "Come the downturn, it would not at all surprising if banks have to go through the same cuts again."

Compensation is already taking its toll. Both JPMorgan and Bank of America said rising compensation was partially to blame for poor first quarter profits. In the case of JPMorgan, however, the 15% rise in compensation expenses between the fourth quarter of 2005 and the first quarter of 2006, was part of a deliberate policy to pay competitively with its rivals.

Brad Hintz, a banking analyst with Sanford C. Bernstein & Co in the U.S., says costs can get bid up quickly at this stage of the cycle, leaving banks in a no-win situation: "Those that don't pay in-line with the market will see staff leave for rivals, and will then have to pay even more to hire new people in."

While banks currently have no choice but to pay generously, Hintz warns they'll show no such generosity in a few years' time: "Have you ever known banks to be altruistic during a downturn?"