Dot-com recruitment fuelled salary spree

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On the whole, bargaining power shifted drastically away from employers. In the process, pay restraint fell by the wayside, with compensation expected to be as much as 40% higher than in 1999. A leading headhunter says: 'Banks were willing to pay a premium just to get someone on board. People of mediocre calibre were offered what was previously restricted to only exceptional individuals.'

Vice-presidents, frustrated by failure to move further up the hierarchy, were especially susceptible to recruitment by dot-coms. Pay rose accordingly. Dee Symons at TMP Worldwide says: 'This year a first-year vp can expect $500,000. In 1999, this figure would have been $300,000 to $350,000.'

In 2000, the sectors that were hot started out really hot, and the sectors that were not, were prematurely consigned to history. The pay differential between the two widened.

Mark Woodhouse at executive search firm Whitehead Mann GKR says: 'Earnings in the hot tech and telecoms sectors have moved away from the older sectors.'

In the bulge bracket, the US head of an industrial sector might now receive between $2.3m and $6m. In telecoms, earnings may be between $5m and $10m. Hard times in hi-tech recently have not made much difference.

Elizabeth Hammond at Heidrick & Struggles says: 'The internet is a sector that people will pay for despite the relative lack of performance. Banks are taking a long-term view and they just cannot afford to lose their star analysts.'

The differential between rainmakers and mere team members also increased. Banks have been willing to pay a big premium for people that can bring a client franchise. 'Reward has increased most rapidly at the very top. There is concern that rainmakers are taking a lot of the bonus pool,' says TMP's Symons.

Guaranteed bonuses, another important feature of the past 12 months, will protect non-rainmakers from losing out too badly. Guarantees were previously the preserve of top performers, but 2000 has seen them offered at all levels.

The effects are likely to be long lasting. 'Guaranteed bonuses are increasingly expected. It's pretty frightening. There are more people locked in than ever before. But you would have been very foolish to understaff last year. Banks just have to hope that they have the right people and that they can cope if there's a bear market,' says Heidrick's Hammond.

Guarantees are not the only things to have restricted pay flexibility. In September, a court ruled that Nomura had been 'perverse and irrational' in refusing to pay a bonus to a dismissed trader. In future, bonuses may have to be decided in accordance with pre-established formulae, limiting banks' discretion.

Some of the risk may have been taken out of bonuses, but employees were given more opportunities to share in the upside - and downside - of business. Goldman Sachs offered stock to junior staff. Morgan Stanley Dean Witter widened employees' opportunity to participate in private equity investment. Lazard too has recently given staff the opportunity to invest in private equity funds.

Analysts were among those benefiting. John Leonard, a banking analyst at Salomon Smith Barney, says: 'The only thing that you can say for sure about analysts is that they generate costs.'

But 2000 saw growing recognition that high-ranking analysts are an asset. 'An analyst ranked in the top eight would have been placed on $500,000 a few years ago. Now they're placed on multiples of that,' reflects Heidrick's Hammond.

Junior analysts gained some of the most important ground. A leaked memo from Salomon Smith Barney reflected problems retaining hard working and relatively poorly paid junior staff. The defining moment for pay came when Donaldson, Lufkin & Jenrette moved the goalposts and offered its junior staff substantial bonuses.

John Axeworthy at the Charterhouse Partnership says: 'This prompted the bigger bulge-bracket firms to review their packages. As a result, the speed of promotion has been increased with most banks now able to promote analysts after two instead of three years.

'A lot of analysts were promoted, but in order to compensate those that were not, salaries had to go up. An analyst in July 1999 would have joined on a base of approximately $28,000. In 2000, the same analyst would have received approximately $38,000.'

Pay is unlikely to increase much further. Charterhouse's Axeworthy says: 'There are rumours that analysts' pay will now be frozen at this level for some time.'

But the colder climate for pay may affect more than just analysts. Consolidation and falling activity have the potential to turn the seller's market into a buyer's market before very long.

In a few years' time, 2000 may well be remembered as the conclusion to a period of rising pay. From here on, the direction is likely to be down.