With Goldman ending its 2-year analyst contracts will new investment banking recruits have to work harder than ever to prove themselves?

It's all over. Until now, graduates who joined Goldman Sachs' analyst program did so on a fixed term two year contract. In 2013, says the Wall Street Journal, they won't. Next year, anyone joining Goldman's investment banking and investment management divisions will join on a standard, open-ended contract - although two year contracts will be preserved for graduate hires in sales, trading and research.

Two year contracts are popular in the US, where it's been common for university graduates to join banks, to work for two years and to then leave to do an MBA. In Europe, they're far less common. However, Goldman Sachs seems to have employed them in London nonetheless - EMEA analysts confirm to us that they were awarded them to work in Peterborough Court.

In theory, there's a big advantage to being a graduate trainee on a two year contract. "It's a pure contract law issue," says Jane Mann, head of employment law at solicitors Fox Williams. "If you employ someone on a two year fixed contract and you fire them before the two years are up, you will be liable for breach of contract."

The implication is that Goldman analyst jobs have been secure for at least two years. Without the two year contract, Goldman can let go of under-performing or surplus analysts whenever it likes.

The two year contract does seem to have provided a degree of protection of new analysts in the past. "They did let go of people," says one ex-Goldman analyst (who left after the contract ended), "but they tried to give them a chance first. There was one guy on my team who just wasn't performing - he was sitting there carrying out his personal business - they kept giving him warnings and eventually he was managed out - although that was towards the end of the two years."

"Under the two year contract, Goldman would still manage out the real under-performers," says another ex-Goldman analyst. "But they would also keep on a marzipan layer of people who were ok but not brilliant and who were told at the end of their first year that they probably wouldn't make it through to a third year.

"These people were needed to do all the formatting, company presentations and grunt work," he adds.

Goldman conducts two performance appraisals a year, say the ex-analysts: one mid-way through and one at the end. There was plenty of opportunity for managing out under-performers if necessary and the two year contract did allow for this.

You shall not leave

What the two year fixed term contract didn't seem to allow for was analysts getting fed up with Goldman and leaving of their own accord - particularly for competitors like the big PE funds.

The Wall Street Journal says this has been a source of peevishness at Goldman, which has been upset by its analysts leaving for PE funds - sometimes only 6 months after joining.

Mann says that individuals who've signed two year fixed term contracts and who leave before they've played out can be liable for damages. However, these damages can be difficult to quantify. "The damages if an employee walks out and breaches a contract are hard to define - they're the cost of finding your replacement and paying the recruitment fee," she says.

You shall prove yourself 

Goldman is painting the end of the two year contract as a good thing for all university leavers joining its IBD and investment management businesses in 2013. The new era will enable Goldman to emphasize the longer term nature of careers at the firm, said spokesman David Wells.

However, the advantages appear to be stacked in favor of the bank: no longer compelled to employ someone for two years unless their performance is truly atrocious, it will find it easier to let go of mediocre analysts in challenging markets. In combination with the recent revelation that Goldman is scrapping its European analyst sector teams and merging everyone together in two large blocks of Southern Europe and Northern Europe, the change also implies that Goldman's analysts will have to work far harder to ensure they become associates. First, they can no be let go at any time. Secondly, they will have to compete with a pool of other analysts if they want to get placed on deals.

Bad news for MBA schools

Finally, the demise of the two year contract looks like bad news for MBA schools - especially in the US. In the past, the end of the two year program provided a perfect lacuna in which to pop off and do an MBA. Goldman even offered all those leaving after the two years a parting bonus. Now, the two year contract is over and so is the bonus. MBA schools will weep for its passing.