How it became prohibitively expensive to hire anyone in the front office

Not long ago, we ran an article claiming banks needed to make 1m in revenues to justify a 250k hire.

It looks like we may have underestimated. Severely.

A 250k hire actually needs a minimum revenue stream of 1.3m in the first year.

This is partly due to increases to employer's national insurance. It's also due to increased salaries, increased bonus deferrals, increased seat cost (one head of recruitment says we underestimated this previously), plus the cost of providing pension and health benefits.

Here's how we got there:

- 150k in salary

- 100k in bonus, of which only 40k is booked as cash this year

- 60k in deferred bonuses from last year (of which 30k is booked this year)

- 20k in deferred bonuses from two year's ago, booked this year

- 32.1k in employer's National Insurance (based on 240k of salary, this year's bonus, and previous year's bonuses as they vest)

- 75k in 'seat cost' to cover premises, compliance, IT and other operational costs.

- 60k to cover pension and other benefits

- 47.5k in headhunters' fees, based on 25% of first year cash compensation at 190k

= A total cost of 515k in year one.

If the hiring bank intends to maintain a compensation ratio of 40%, the new recruit will need to generate 1.3m of revenues.

The extra deferral deterrent

If this is insufficient to make line managers think carefully about hiring, recruiting firms also need to consider the total value of the deferred bonuses they're buying out.

Even though these don't vest immediately and are subject to multi-year vesting schedules, they represent a significant cost commitment. This is because when an employee is made redundant, any stock he or she owns usually vests immediately.

Needless to say, new EU compensation rules mean front office bankers will have far more substantial deferred bonuses in future. As the value of those deferrals increases, so does the downside risk of hiring someone.

Maybe this could be why 2011 isn't proving a great year for big ticket investment banking hires.