How the FSA’s remuneration policy has killed hiring, and what you can do about it

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In a normal year, banks might be getting ready to hire people around now. Hiring plans would have been laid and recruiters would be preparing to bring them lovingly to fruition.

This year, there is none of that.

“The only thing that is certain is that there is not going to be much happening,” says the head of one recruitment firm. “It’s a really weird year,” confirms another. “Banks would usually have made their hiring plans in November, but this year they don’t know what’s going on even now.”

The broader economic situation clearly bears some of the blame. Trading volumes are down, even on last year. Europe continues to weigh on capital markets and M&A activity: Western European M&A deals were allegedly down 60% month-on-month in January.

However, when they complain about the current lack of hiring, it’s not the European situation headhunters complain about most: it’s the FSA. More specifically: it’s the FSA’s remuneration policy. It’s smothering hiring at birth.

Lack of liquidity

“The real story is liquidity,” says the head of one search firm. “There isn’t any.”

Translated, this means: people don’t want to move jobs. There are several reasons for this and the FSA is apparently to blame for them all.

The dead hand of deferred stock

In the first place, there is the issue of deferred stock. Last year was the second year in which a high proportion of bigger bonuses were deferred. This year, deferrals at most banks have risen again. If a bank wants a candidate to move, it will typically need to buy out all this deferred stock. And in the current market, that’s seen as too costly.

“In this environment, will banks really stump up and award replacements for all that deferred stock when they want to hire someone?” says the head of one search firm. “It’s the question everyone’s asking right now.

“It’s not so much of an issue if someone’s leaving and you’re replacing them,” he adds. “But it makes new headcount difficult to justify unless someone’s clearly going to generate alpha.”

Banned buyouts

In the second place, there’s the fact that candidates don’t want to move to a new employer when that new employer is restricted by the regulator both in terms of buying out their previous deferred stock bonuses and in terms of offering them a guarantee for their compensation in the first year.

And then, even if a bank wants to buy out a candidate’s stock and wants that candidate to work for it, it will struggle to offer a guarantee if the candidate is earning more than £500k and will equally only be allowed to buyout existing stock in a small percentage of cases. As we pointed out last year, this is because the EU seems to be assuming that candidates will retain stock in former employers when they move.

“Buyouts are seen as similar to guarantees,” says Sam Whitaker at law firm Shearman & Sterling. “They can only be used in a limited number of circumstances.”

No uplift in a new role

In the third place, for individuals earning more than £500k, the FSA has stipulated that any compensation guarantees issued must not amount to more than an individual earned the previous year.

This effectively means that highly paid bankers disappointed with their 2011 bonuses will have no real incentive to move on. “People aren’t buying into a move when they’re being asked to take all the risk,” says the head of another search firm.

Equivalent vesting

And finally, the FSA says that in the event that a deferred bonus is bought out, it must follow the same vesting schedule as previously. An individual who’s worked for Credit Suisse and who moves to Goldman Sachs will therefore be unable to escape Credit Suisse’s comparatively punitive vesting schedule.

Headhunters claim this is dissuading candidates from joining European banks in the first place and is another barrier to hiring.

What this means for you

If you’re earning less than £500k (and less than a third of your compensation is paid in bonus), you are outside the FSA’s rules and none of this may seem to make much difference. However, it does make a difference to the extent that the lack of churn at the top will lead to less hiring lower down. Invariably, the arrival of a new senior person is the catalyst for a lot of junior and mid-level hiring. Worse, there is little you can do about it.

If you’re earning more than £500k and can’t find a new bank to buy out all your deferred stock, you can do something about it. There is another alternative: voluntary redundancy. You still may not get a guaranteed bonus when you join a new role, but you will get to leave an existing employer with your stock intact and will be a cheap hire with a better choice of future roles. Headhunters say this option is increasingly being taken by strong candidates at the top end, who are confident of their ability to get back into the market when they want to.

“Some people have agreed to sit out,” says Russell Clarke at search firm Figtree. “They’ve become good leavers in order to get their stock and will sit out for anything from six months to two years.”

By 2014, things may even have improved.