It is too bad that one can't bet on the volatility of the labor market in finance.

It appears to soar and plummet as wildly as any ticker on the Street.

Since its peak in the fourth quarter of 2007 through the second quarter of 2009, the U.S. finance industry shed almost 7% of its workforce, roughly 572,000 jobs, according to data compiled by the Bureau of Labor Statistics and Moody's, a New York-based credit-ratings and research company.

But last September, there were 211,000 openings in the U.S. finance industry and many firms are rushing to sign on troops to make land grabs in the industry's newly fertile fields like risk management, mortgages and wealth management.

"Companies over-hire when the economy is booming and overfire when the economy contracts," said Boris Groysberg, an associate professor at Harvard Business School. "It happens across the board and it's a very inefficient way to do it."

Indeed, balance sheets that have been weighed down for months by severance payments are now being siphoned off for search fees and signing bonuses. This is nothing new; the same cycle played out in the early 1990s, 2001 and following nearly every other downturn on the Street.

However, there is a growing body of research that argues that such costs can be contained. In an industry that spends most of its money on compensation, building a more efficient talent pipeline can help a company keep its momentum in a downturn and rocket to the forefront in a recovery -- like a race-car driver who relies less on both the accelerator and the brake.

We caught up with two of the leading critics -- Groysberg, at Harvard, and Peter Cappelli, director of Wharton's Center for Human Resources at University of Pennsylvania's Wharton School of Business -- to find out how finance companies can better manage their most valuable assets. Here are a few of their suggestions:

-- Forget forecasting: Forecasts aren't fluid. Plans based on more fluid simulations of future market conditions are more adaptable. Savvy managers have a number of hiring strategies for a number of different market conditions.

-- Lay off strategically: Don't just cut an equal amount across the board. Make the hard decisions to figure out which workers are "muscle" for the company and which are flab.

-- Generate a mix of "make" and "buy": Buying talent is quick and relatively easy, but it's also expensive. Building talent takes precious time, but often saves money. Firms with smart recruiting strategies do not rely too heavily on either approach.

-- Consider each worker a portfolio: With a portfolio, diversification is key. The best companies groom their most promising workers for a variety of roles. If one line of business dries up, versatile workers can be switched to a hotter sector.

-- Hire more often: Toyota doesn't order its components two or three times a year, so why would a bank or brokerage staff up in just a few large waves. The cattle-calls from MBA-programs and those that follow a surge in the market are usually less effective -- and more expensive -- than slow and steady staffing.

-- Be Bearish: Bear Stearns may have done a lot of things wrong in the end, but the firm was praised for its staffing. A true meritocracy, the bank had an office of mediation that helped smooth job transfers within the firm, creating a more flexible workforce without the secrecy and power struggles that plague so many finance shops.

-- Expand the horizons: The borders of the finance world are not the East and Hudson rivers. Some of the most talented workers in the industry are far from Manhattan. Incidentally, these people often earn less than their Big Apple counterparts, which brings us to the final point....

-- Think like a trader: The best investors look for something that's undervalued and then wait for it to appreciate or build it into something more valuable. When it comes to employees, however, Wall Street often buys high. "Companies say: 'Who's the leading firm in NY? Who's paying the most? Let's go buy someone from them.'" Capelli said. "It's bizarre."

Best of Breed
So who emerged from the crisis with momentum and the proper manpower? Recruiters point to Deutsche Bank, which scooped up scads of employees from Bank of America Merrill Lynch. Goldman Sachs is also applauded for its steady hand and knack for finding talent from smaller, lower-profile competitors.

Groysberg noted that Goldman does a particularly effective job of supporting its employees, assimilating them into the culture and deploying them in teams.

"They treat new-hires like mini-acquisitions," he explained. "That's actually quite rare to the finance industry; most managers believe it's plug and play."

The Harvard professor also lauded Deloitte LLP, which broke ground in October on a massive new "university" in Texas where it will groom its future leaders.

Cappelli, meanwhile, applauded widespread unpaid leave programs and deferred start dates for new hires -- both relatively new approaches for finance managers. Such initiatives helped companies spread out workforce expenses, while responding to changes in the business climate.

Critical Thinking
Despite the blistering speed of technological innovation, change comes slow to Wall Street.

"What's amazing about this is the extent to which so many companies don't think about this at all; they don't see it as a problem that is solvable," Cappelli said. "Their HR people say 'Tell us the five-year plan and we will build systems around that.' But if you tell them that the five-year plan has a 5% chance of being right, their eyes just glaze over."

Leslie Gordon, global sector leader of investment banking, capital markets and alternative markets at Korn/Ferry, a Los Angeles-based recruiting firm, urged many of her clients to step on the gas during the crisis.

"I advised them to be more aggressive about capitalizing on all of the dislocation," she said. "It was a terrific time to hire."

While many boutique banks did just that, most of the big players were downsizing. Gordon, however, does not expect the crisis to change the way that finance managers strategize about hiring and firing,

"It's a cyclical industry and they staff up in good times and staff down in bad times. What's left at some point is a healthy company," she said. "While it may seem to some that it isn't particularly strategic, it is the nature of the industry. There's an urgency about everything in the business."

Write to Kyle Stock

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