Be careful where you work: the London hiring market has a totally new dynamic and when you join a large investment bank you will get stuck there

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You are going to be locked in. (Photo credit: Wikipedia)

The career path of Mark Lane, the banker who tragically died last month, was a reminder of how things used to be. Between 1993 and 2006, Lane worked for four different banks, for an average of around three years each.

Lane wasn’t the only one to switch employers regularly. Until recently, it was common practice. Hence, for example, Alexei Litvintsev , one of three bankers to recently join Troika Dialog in Moscow, a VP who reportedly has no more than a decade of experience in banking, has previously worked for Credit Suisse, Goldman Sachs, UBS and JPMorgan.

The fact is that it used to make big financial sense to move to a new bank every few years.

Firstly, hiring banks would typically buy out all your deferred bonuses from a previous employer.

Secondly, hiring banks would often guarantee to pay you more a lot more than you earned at your previous employer, and would guarantee to do so over a 1 or 2 year period. Moving jobs was a way of increasing pay.

Hence, the perfect banking career path looked a little like: this. 

And now? Things have changed. They have changed a lot.

1. No more guarantees

The big change, according to headhunters, is the lack of guaranteed bonuses on offer.

In 2010, guaranteed bonuses accounted for around 10.5% of the average bank's bonus pool. This year, they will reputedly account for hardly any.

“The main difference this year is that we are seeing very, very few guaranteed bonuses,” says Simon Head at search firm Correlate. "Last year, guarantees for some banks used up a lot of the bonus pool and it would be problematic to award similar levels this year.”

As a result, when you join a new firm, you cannot know precisely how much you will get paid.

2. Very few buyouts, no guarantees for more than you earned before

As we noted in January, the FSA carries much of the blame for the change in the hiring dynamic in London: it’s pretty much banned guaranteed bonuses and buyouts, and in the few instances that guarantees are offered, it has forbidden hiring banks to attract new hires by promising to pay them more than they’re earning already – they can only promise to pay the same.

As a result, people have no incentive to move."This is exactly what the FSA's remuneration code is designed to do." explains Mark Ife, a partner at Herbert Smith. "It is designed to tie their remuneration in to their existing employer's business so that they are not taking risk with one employer and then moving on to another in order to be bought out."

As a corollary of this, people working for large banks are now in some danger of being stuck with the same employer for life.

 3. A very punitive definition of guarantees and no real, ‘escape clause’ 

Much of the problem is in the way the FSA defines guarantees.

In the past, a guaranteed bonus was what a hiring bank promised to pay in years one and/or two of your new employment. It was a promise to pay you more money and a way to get you on board.

This guarantee was a accompanied by a ‘buyout.’ Under the 'buyout,' the hiring bank compensated you for all the deferred bonuses you were walking away from at your previous employer.

And now? The FSA defines both buyouts and traditional guarantees as ‘guarantees,’ says Ife. And it specifies that guarantees can only be offered in “exceptional circumstances.” Therefore, in most cases people who move jobs are being asked to walk away from all their deferred bonuses with previous employers and to move without any certainty of future income.

If this sounds punitive, it is. There’s supposed to be a get-out clause, however. As we’ve reported in the past, if you earn less than £500k and less than a third of your total compensation is in the form of a bonus, the FSA’s strictures on guarantees, deferrals and buyouts don’t apply.

In reality, however, lawyers say they almost always do apply.

"It's very difficult to recruit someone on the basis that their bonus is less than a third of their total compensation," says Ife. "If you're earning £100k in salary and your bonus turns out to be £100k, you will be caught under the FSA's bonus rules, even though you're earning less than £500k."

In the current climate, banks are unwilling to increase salaries sufficiently to exempt people earning less than £500k from the FSA’s rules. There’s also the problem that when banks offer guarantees now, they are typically guaranteed minimums – someone who outperforms may end up with a bonus that exceeds 33% of their total compensation, with the result that the guarantee will become subject to FSA scrutiny.

Hence, even ‘low earners’ on a lot less than £500k are struggling to achieve any certainty about what they’ll earn with a new employer.

Be very careful where you work

The outcome of all this, is that while careers in financial services used to be punctuated by a series of rapid fire moves from bank to bank in search of new experiences and higher pay, in London at least they are now going to be characterized by long periods with a single employer.

If you move, you will need to take a big risk. You won’t necessarily know how much you’ll earn with a new bank. You may need to walk away from a large chunk of deferred compensation.

Because of this, Head says candidates are starting to think very carefully about where they work: “People are long term. They need to be very strategic in their career choices and to look at the long term viability of the business they’re moving to.”

With this in mind, sales and trading candidates may want to cast an eye over today’s news that Morgan Stanley, UBS, Citigroup and BAML are in danger of being downgraded to just a few levels above junk. Derivatives counterparties will be less keen on trading with those banks as a result, points out Brad Hintz, an analyst at Sanford C. Bernstein & Co. Conversely, counterparties will be more keen to trade with the likes of Goldman Sachs, Deutsche Bank and JPMorgan, which are still rated A. 

When you’re going to work somewhere for decades, such considerations suddenly seem a lot more important than they ever did before. Look very carefully before you leap.