Europe's Bankers Face Bonus Blues

Working as a trader or an investment banker at a European bank might be about to get a whole lot less lucrative.


Sweeping new guidelines on bonuses set to be issued by banking supervisors from all 27 European Union nations will force a radical overhaul of how banks pay their top performers in an industry that already claims to be suffering from regulatory overload.

However, they could also throw up peculiar anomalies that would disadvantage European banks in vital markets such as the US and Asia, senior bankers have warned.

Draft guidelines on how tough new rules on pay agreed by the EU this summer should be interpreted may require banks to impose a range of new limits, including capping bonus payments at a multiple of annual salary and limiting the cash component of bonuses to 20 percent of the total amount.

Those two measures alone would mark a huge change for an industry that is based – at least in theory – on the premise of pay for performance.

But perhaps the biggest potential blow to European banks is the fact that the draft proposals would apply to senior staff and “risk-takers” across the worldwide operations of European-based organizations.

That means that a banker working for Barclays Capital, Barclays’ fast-growing investment banking operation, or Deutsche Bank on Wall Street or in Hong Kong would be hit by the new regulations.

By contrast, bankers and traders at Goldman Sachs and JPMorgan Chase would only be caught if they work in EU financial centers. The same would apply to the two big Swiss investment banks, UBS and Credit Suisse.

The Committee of European Banking Supervisors, the umbrella body for banking regulation across the EU, concluded its discussions in London on Thursday night and it is possible the draft guidelines published will differ. But even if they are softened, they are still likely to force a fundamental rethink of how banks are structured.

Investment banking is a volatile business and banks have historically sought to limit their fixed costs by keeping salaries relatively low and distributing a large chunk of their revenues in the form of discretionary bonuses.

For example, Bob Diamond, the BarCap head who will become the bank’s chief executive next year, earned a salary of £250,000 ($396,475) in the years leading up to the financial crisis. His annual cash and share bonuses, however, topped £20 million in both 2006 and 2007 – 80 times his fixed salary.

Amid the fallout from the crisis, and under pressure from global regulators to reform their pay structures to better link risk with reward, most big US and European banks have raised salaries significantly in an effort to reduce their employees’ reliance on one-off bonus payments.

For top earners, however, the multiples remain high, particularly by comparison to other industries. Stuart Gulliver, the head of HSBC’s investment bank and future chief executive, was paid a £9 million all-stock bonus for his performance in 2009, more than 11 times his basic salary of £800,000.

The draft proposals would accelerate the trend towards bigger fixed salaries, making it more difficult for banks to cut costs in a sudden downturn but also potentially sidestepping the thornier issue of how to bring the industry’s overall pay bill down, regulators and analysts said.

Data released on Monday by the Centre for Economics and Business Research revealed that financial services sector workers in London can expect to receive as much as £7 billion ($9.7 billion) in bonuses when banks begin distributing the awards next year.

“You can’t regulate one half of the equation,” says one senior European regulator not involved in the CEBS meeting. “If you limit bonuses, banks will just hike bankers’ basic salaries again. Or they will restructure contracts to get around the rules so that in-house employees become outsourced contractors.”

Regulators are also considering requiring each country to set a numerical floor where the pay restrictions would kick in, and imposing additional limits on how long employees must hold bonuses paid in deferred share awards that vest over several years.

In the UK, the Financial Services Authority’s existing pay code applies to people making over £500,000.