Jan. 17, 2005 -- You don't need to be a rocket scientist to spot that equity research is less lucrative than it used to be. Analysts with five years' experience in the City of London in 2000 could take home £400,000 -- or more than €570,000. That may be a wild generalization. But nowadays the figure is more like £200,000, according to headhunters. Could this spell the death of the star analyst?

Things don't look good. The reduction in analyst pay reflects the underlying profitability of the equities business, which is poor. Analysts have also lost the fat subsidy they used to get from investment-banking departments, courtesy of overhauls by New York Attorney General Eliot Spitzer. And there are still plenty of out-of-work analysts, edged out during the bear market. Only in certain areas -- banking, insurance, oil, pharmaceuticals -- does demand outstrip supply.

Yet it would be wrong to conclude that research has become a low-margin commodity. A strong research department still indirectly boosts a bank's corporate business. That's because companies interested in tapping the capital markets will want to use banks whose equity research is held in high regard by investors. Moreover, hedge funds will heap commission on banks with analysts capable of delivering brilliant short-term trading ideas.

What this makes for is a polarization of analyst compensation. Equities chiefs will still pay up to attract the best research talent. And if anything, there aren't enough star analysts to satisfy market demand for good ideas. Many research stars left the industry because they no longer needed the money and couldn't be bothered with all the new red tape. That has created a succession problem.

So in the current bonus round, many analysts at managing-director level are having their bonuses cut. The proceeds have been used to reward the best junior analysts in their late 20s and early 30s -- those who look like tomorrow's stars.