Banks increase use of handcuffs

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Couples in the UK whose divorce has been approved by a judge face a six-week wait before their separation is final. Some banks are adopting a similar approach to their staff by imposing longer notice periods.

An analyst at Merrill Lynch said the bank had doubled its notice period from three to six months to dissuade analysts from leaving.

Last year, Merrill asked senior executives to give six months' notice of their intention to leave.

Merrill declined to comment, but the head of human resources at a rival bulge-bracket firm in the City of London said investment banks were tying down staff for longer periods.

He said: "Most US banks traditionally had a one-month notice period. They are increasingly changing that to three months, like European banks."

David Dalgano, an employment lawyer at London solicitor McDermott Will & Emery, said Merrill was probably the only bank imposing six-month notice periods. "Banks typically range between one and three months," he said.

The rationale behind the longer notice periods is staff retention. One head of HR said: "Longer notice periods are seen as a disincentive to hire people away. By the time someone leaves, their client relationships are less productive."

Long notice periods are costly, however. One US bank said it stuck with one month on cost grounds alone. "A study showed it was prohibitively expensive to keep people on the books for an extra two months," it said.

It is rare for bankers to remain productively employed during their notice. Having declared their intention to go, Dalgano said they were typically sent home on gardening leave until the notice period was over.

Banks wanting to limit the damage done by wayward staff can take a leaf from the inter-dealer brokers' book of employment practices. Damien Lee, managing director of Search Partners, a headhunter used by Cantor Fitzgerald, said six-month notice periods were relatively common in the sector.

Lee said brokers saw the long notice period as a window in which to spoil a departing employee's customer relationships. "Six months is a long time not to talk to your customers. While you are at home sitting in the garden, another broker will be wining and dining them, and trying to encourage them to move to him," he said.

Escaping the shackles of an inter-dealer brokerage is complicated because three-year contracts are common. Brokers are most likely to resign towards the end of their contracts and headhunters track this carefully.

"We know the contract for employee X is coming up in two months, and we'll be all over him," said Lee.

Banking headhunters in Germany face a similarly limited window of opportunity. German notice periods are typically three to six months and would normally run from the end of a quarter.

Bernd Weller, an employment lawyer at Lovells in Frankfurt, said a banker with a three-month notice period who wanted to leave in January would have to wait until the autumn to resign.

John Jessen, a director at Frankfurt executive search firm Smith & Jessen, said this came as a shock to some US banks. "US line managers who are unfamiliar with the German market address their hiring needs in January and February in the expectation that staff have a one-month notice period. In fact, they should have been thinking about headcount requirements the previous summer," he said.

Notice periods are non-existent in the US, where employment is typically "at-will". Robert Stulberg, an employment lawyer at Broach & Stulberg, a Manhattan law firm, said US bankers who wanted to leave the next day were typically free to do so.

In the absence of notice periods, US banks take an alternative approach to retaining staff. Jay Gaines, president of Wall Street recruiter Jay Gaines & Co, said restricted stock and guarantees were common for this reason.

Lazard, for example, has offered three-year bonus guarantees to some directors after its initial public offering. According to the Wall Street Journal, Morgan Stanley has offered some staff restricted stock worth several million dollars in the face of senior-level departures.

Merrill Lynch is understood to have threatened to withhold bonuses from its London analysts unless they agreed to its new notice period.

However, Gaines said Morgan Stanley would be foolish to treat European employees similarly.

He said: "A company in crisis that tries to tie in people contractually risks losing everyone. People resent being handcuffed to a firm."

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