European banks may resort to more jobs cuts or zero bonuses as they struggle to maintain fixed compensation levels amid deteriorating financial markets.
The companies are facing shrinking revenue and higher costs after raising base salaries of investment bankers by as much as 100 percent. That decision, which followed regulations to curb bonuses in the wake of the credit crisis, is irreversible even if conditions worsen, lawyers and consultants said, leaving banks with fewer options in their bid to improve margins.
“The absolute last thing banks will want to do is cut current salaries unless they have an explicit contractual right to do so,” said Jason Butwick, a London employment attorney at law firm Dechert LLP. “The legal, reputational, commercial and logistical risks of going down that route are huge.”
European banks including UBS AG, Barclays Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Credit Suisse Group AG have announced more than 70,000 job cuts since midyear, compared with 42,000 by U.S. peers, according to data compiled by Bloomberg.
Nomura Holdings Inc., Japan’s largest brokerage, plans to cut about 5 percent of jobs in Europe, two people with knowledge of the matter said today. Fewer than 400 positions will be eliminated globally, with the majority in Europe, one of the people said, declining to be identified because the information is confidential.
Costs on Rise
Compensation cost as a percentage of net income at the 20 largest investment banks will increase for a second year to 65 percent in 2011 from 55 percent in 2009, Barclays Capital analysts said in an Aug. 10 report. It could be more than 80 percent at the investment-banking units of UBS and Credit Suisse, both based in Zurich, and Tokyo-based Nomura Holdings Inc., the analysts said.
Banks are struggling with slower economic growth and a spreading debt crisis that is sapping confidence in Europe’s financial institutions. Combined revenue for the 20 largest global investment banks was down 8 percent in the first half, after a 23 percent drop in the same period last year, the Barclays analysts said.
The 46-company Bloomberg Europe Banks and Financial Services Index has fallen 38 percent this year.
Jonathan Nicholson, managing director of Astbury Marsden, a London executive-search firm, said more job losses are imminent.
“There are fewer bonuses to play with than ever before,” Nicholson said. “The fixed costs are now about 70 percent to 80 percent of overall total compensation, so you have less to play with the bonus pool than ever before. The only material way to make a difference in flexing costs is to cut jobs.”
Spokesmen for UBS, Nomura, RBS, HSBC, Barclays and Credit Suisse in London declined to comment on plans to reduce costs through cuts in jobs or compensation.
The rise in fixed costs is driven by an increase in base salaries after European regulators, including those in the U.K. and France, restricted when and in what form bankers can be paid. The average base salary of a managing director at a global investment bank in London surged to between 300,000 pounds ($474,480) and 500,000 pounds from 175,000 pounds to 250,000 pounds three years ago, said Jason Kennedy, chief executive officer of Kennedy Group, a London-based search firm.
Total Compensation Falls
Fixed-compensation costs, which include salaries and deferred bonuses, rose to 82 percent of total pay at Credit Suisse in 2010 from 66 percent in 2009, according to a JPMorgan Cazenove report in June. At UBS’s investment-banking division, fixed compensation rose to 65 percent from 55 percent in 2009, according to the report.
Total compensation for investment-bank employees has decreased since 2007. Workers at UBS’s investment-banking division were paid an average of 399,940 Swiss francs ($454,790) in 2010 compared with 474,968 francs in 2007, according to the annual report. Average pay at Credit Suisse’s investment bank fell to 388,067 francs in 2010 from 494,708 francs in 2007. At Goldman Sachs Group Inc., average pay dropped to $430,700 in 2010 from $661,490 in 2007, according to the annual report.
Banks in Europe are balancing the need to retain talent and control costs as they comply with new pay regulations and capital requirements. In December, the European Union’s Committee of European Banking Supervisors issued rules limiting bankers to receiving about 25 percent of their bonuses in immediate cash payouts, with the rest deferred or held in shares for a minimum of three years. Bonus awards should be split between stock and cash, and at least half of each segment of the bonus must be deferred at least three years, regulators said.
In the U.K., banks with consumer and securities units will have to capitalize them separately by 2019 to shield customers and taxpayers from the consequences of a financial crisis under proposals made yesterday in a report by the government-appointed Independent Commission on Banking. The plans would add as much as 7 billion pounds in costs, the report said.
Salary reductions could cause “an enormous public-relations problem,” said Mark Mansell, an employment lawyer at Allen & Overy LLP in London. They could also lead to a talent exodus, said Andrew Evans, chief operations officer of the financial-services unit at search firm Morgan McKinley.
“Continued turbulence in global financial markets is definitely putting pressure on banks’ staff costs,” Evans said. “However, simply reducing salaries could result in the loss of top talent.”
A top trader at a large hedge fund might expect to take home 15 percent to 20 percent of what he makes for his employer compared with 12 percent to 15 percent at a big investment bank, according to Kennedy.
“Financially, banks today cannot compete with hedge funds,” he said.
Cutting salaries is also complicated under U.K. employment law, according to lawyers and pay consultants.
While banks can ask employees to accept pay cuts, they can’t impose them easily if bankers refuse, Dechert’s Butwick said. Any firm looking to reduce the salaries of more than 19 people must undertake a 90-day consultation, which is likely to be made public and reflect badly on the bank, he said. If banks terminate contracts and ask employees to sign new ones, they would be open to claims of unfair dismissal, Butwick said.
Goldman Sachs Cuts
“The real action of cost-cutting will be around bonus pools and headcount,” said Tom Gosling, a partner in the rewards practice at PricewaterhouseCoopers LLP in London. “There’s a lot of nervousness. If we do get a full-blown banking crisis, then the bonus round will be very bad. There will be a much stronger divide between high earners and everyone else, and a big jump in the number of zero bonuses.”
One option is for banks to insert a clause into contracts giving them power to reduce base salaries after a set period or in the event of a decline in trading conditions.
Goldman Sachs is one of the few banks that did that. The New York-based company will cut the salaries of some London employees who received temporary increases in 2009, a person with knowledge of the matter said last month. Less than half the firm’s London workers got raises that are set to expire, said the person, who declined to be identified because the firm’s pay practices are private. Joanna Carss, a spokeswoman for Goldman Sachs in London, declined to comment.
Lloyd C. Blankfein, Goldman Sachs’s chairman and CEO, warned against raising base salaries on Wall Street in a June 16, 2010, interview with staff of the U.S. Financial Crisis Inquiry Commission.
“Salary is another form of guarantee, so we would like low salaries and high contingent comp,” Blankfein, 56, said at the time, referring to compensation based on performance. “We think the world is going in a poor direction.”
Switzerland’s bank-personnel association, which represents workers, demanded “symmetry in sacrifice” after UBS and Credit Suisse, the nation’s biggest banks, announced staff reductions.
“Any job cuts have to be linked with a 10 percent cut of the highest salaries,” the group said in a statement Aug. 23 in response to UBS’s plan to slash 3,500 positions. The association also asked Credit Suisse to stop “excessive payments” to executives after the bank said in July it would cut 2,000 jobs.
Credit Suisse CEO Brady Dougan’s 2010 pay was reduced 34 percent to 12.8 million Swiss francs after profit declined. The bank’s 16-member executive board received total pay of 160.3 million francs, up from 148.9 million francs received by 13 people in 2009.
Oswald Gruebel, 67, CEO of UBS, decided to forgo a bonus again in 2010 because the company’s shares didn’t rise. He received 3 million francs in base salary and 25,600 francs of benefits in kind. The company’s 13-person executive board received combined compensation of 91 million francs for 2010, compared with 68.7 million francs the previous year.
U.K. financial-services firms have reduced pay for new employees. The average salaries for newly hired financial-services workers in London slipped in the first half of 2011 to 53,461 pounds from 53,470 pounds in the second half of last year, estimates by Morgan McKinley show.
“Deep down, everyone knows there needs to be a resetting of compensation practices,” said PwC’s Gosling. “It will take time to come through, but that will mean more differentiation within and between firms, more zero bonuses and more awards where pay is contingent on certain conditions being met.”