London's financial sector may be booming, but investment banks are ditching poorly performing staff, a move headhunters say may blunt rampant expectations about this year's bonuses.
Bonus hopes are running high after a record year for mergers and equity and bond deals in Europe. But as the banks decide who gets what, a few firms have decided to make job cuts.
HSBC and Dresdner Kleinwort have both cut jobs in their investment banking divisions, while Royal Bank of Scotland is closing its London proprietary trading desk in foreign exchange.
Andrew Chancellor, managing director at recruitment firm Robert Walters, said this would help keep bonus expectations in check.
"It also gives them a chance to get rid of the bottom percentage of their staff," he said. "It's just a good time to look at the business, clean it up a bit."
Investment banks have been raking in cash this year from a boom in M&A deals in Europe that has already topped the trillion dollar mark.
Top performing bankers could receive up to $10 million or more in bonuses, which are forecast to rise by as much as one third over last year's payouts.
Staff at Morgan Stanley, Goldman Sachs and Lehman Brothers are set to find out about their bonuses in the next week or so.
European banks, which typically award bonuses after January, are in the thick of performance reviews to determine how much each banker should get.
"All the senior bankers are busy with review meetings and bonuses," said one executive at a European investment bank.
Senior executives have to decide how to share out the bonus "pool" to make sure they can keep top performers happy.
Dresdner Kleinwort, for example, is undergoing a wider restructuring to boost revenues under new boss Stefan Jentzsch, who has pledged to double the firm's revenues in the next three to five years. A Dresdner spokeswoman said earlier in the week that cuts were across all areas and at all levels.
"Stefan Jentzsch appears to be making selective cuts so that he can incentivise the people he wants to keep," said European banks analyst Matthew Clark at broker Keefe, Bruyette & Woods.
Bankers say some staff will be disappointed with their bonuses because expectations tend to run ahead of reality, which means there could be a lot of job movement next year.