Blowing bubbles with investment banking pay

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Only a few months into 2007 and bonus predictions are already being issued. Three-year guarantees are said to be increasingly common.

Investment banking (aka corporate finance) pay will increase 'significantly' again this year, according to the latest report from Wall Street pay consultant Alan Johnson. After record payouts for last year, he says the world's corporate finance bankers are in line for another 20% bonus hike in 2007.

What makes corporate financiers so lucky? "The business is good, banks are building out and there are all the signs of wage inflation," says Johnson.

Barclays' potential €59.7bn ($79.6bn) merger with ABN AMRO is suggestive of the promising pipeline. And earlier this month global M&A deals totalled 50bn in just seven days.

Others are not so sure, however. Figures from Thomson Financial suggest deal activity fell 25% in the first quarter of this year, compared to the final three months of 2006. "It's ludicrous to say compensation will be up 20% at this stage," says one London headhunter. "Most people think M&A activity will be flat this year. If we do see any increase it's likely to be at the junior end where everyone's short of talent."

Meanwhile, Johnson says three-year guaranteed bonuses are increasingly abundant - something unseen since the last market peak in 2000. "It's the senior bankers and senior traders who are needed to build and fortify new businesses who are commanding long guarantees," he says. "Historically, this has been a symbol that the market has overheated."

Johnson claims it's the biggest and best-established banks that are paying the longest-guaranteed bonuses, largely because they can afford it.

However, headhunters say this month's departure of Stuart Upcraft, a UK M&A banker, from Lehman Brothers suggests that Lehman, in particular, has been less liberal with long guarantees than previously thought. Upcraft joined Lehman in July 2005 - he may have stuck around for two years' guaranteed bonuses, but his departure implies a third may not have been forthcoming.

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