The Higher You Fly, The Faster You Fall

Junior investment banking staffers have benefitted from fair conditions these 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 recognize that," says Alan Johnson, chief executive of Johnson Associates, a Wall Street pay consultant. "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 the analyst and associate level, particularly in corporate finance. A recent study by the Financial News found nearly 100 percent of banks plan to hire junior M&A employees in next few months.

Predicting The Turning Point

Logan Naidu, a consultant at London recruitment firm Cornell Partnership, predicts another 12 to 18 months of recruitment before any cutting begins. Johnson sees investment banking in the fourth year of a five-year cycle that began with the downturn of 2002. "Pay will turn down and hiring will turn down even faster once the business gets soft," he predicts.

The current cycle is different from others, Johnson says, because banks were initially slow to ramp up recruitment this time. "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."

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