London Bankers Bracing for Leaner Bonuses Than New YorkAmbereen Choudhury, Elisa Martinuzzi and Ben Moshinsky
Bankers in London, the hub for securities firms in Europe, are bracing for lower bonuses compared with New York counterparts as earnings from the region plummet and pressure to tighten compensation mounts.
Investment bankers and traders at European banks should expect at least a 15 percent cut in pay this year, while U.S. lenders may leave compensation unchanged, three consultants surveyed by Bloomberg said. That’s because bonus pools at European banks may be reduced by as much as half, while those at U.S. firms, which can cushion the impact of falling fees in the region with earnings from home, may fall 20 percent, they said.
“The real split is coming, and we will see the quantum divide this year,” said Tom Gosling, a partner at PricewaterhouseCoopers LLP in London, referring to the difference in pay between the two financial centers. “U.S. regulators don’t have the same obsession with pay structures that European regulators have.”
While lower pay for all bankers reflects what may be a temporary drop in business, cuts at European lenders probably will be structural rather than cyclical, cementing a two-tier system, said John Purcell, chief executive officer of Purcell & Co., a London search firm. They also could spur some employees to relocate, according to recruitment company Astbury Marsden.
European taxpayers still haven’t been reimbursed for bailing out firms such as Royal Bank of Scotland Group Plc and Amsterdam-based ING Groep NV, and the region’s lenders face further losses amid rate-rigging and money-laundering scandals. As a result, policy makers are capping bonuses and forcing banks to defer more compensation and claw back pay.
“Europe is moving into a new phase of heavier and more intrusive banking regulation requiring more capital, greater liquidity, lower leverage and tighter restrictions that’s likely to push pay lower in particular for capital-intensive products,” said Lex Verweij, a London-based partner at McLagan, a unit of Aon Hewitt LLC, who advises financial firms on pay. “Banks are facing public pressure to slash compensation significantly, even where performance hasn’t been that bad.”
The region’s sovereign-debt crisis has crimped revenue at European firms. Investment-banking fees, a key component in compensation, may fall 20 percent to about $15.8 billion in Western Europe this year from 2011, New York-based research firm Freeman & Co. estimates, based on an analysis of dealmaking and equity, bond and syndicated-loan sales. Fees in the U.S. may rise 5 percent to $39.5 billion, Freeman said.
Investment-banking fees in Western Europe may be 53 percent lower this year than at their 2007 peak, compared with a 24 percent drop in the U.S. during the same period, the firm said.
Stock sales in Europe have fallen 23 percent this year, while those in the U.S. are up 23 percent, according to data compiled by Bloomberg. Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co., all based in New York, are among the five leading global merger advisers this year, and the top five underwriters of stock sales are U.S. firms, the data show.
“The tilting of the field is driven by the economics of being part of the European Union,” said Alan Johnson, founder of compensation consultant Johnson Associates Inc. in New York.
London-based employees of U.S. and European banks are subject to the same restraints on pay. Still, bankers working for European firms probably will earn less regardless of whether they’re in New York or London because compensation for those employed by U.S. lenders will be cushioned by earnings from North American operations, recruiters said.
The bonus pool for bankers in London’s financial district, known as the City, may fall by one-third to 4.4 billion pounds ($7 billion) in 2012 from a year earlier, the Centre for Economics & Business Research Ltd. said this month. It probably will plummet to about 1.6 billion pounds in 2013 as firms cut jobs in the City, the research group said.
London’s financial-services industry could lose more than 30,000 jobs in 2012, the group said, and by 2015 the City may have fewer employees than Hong Kong or New York.
Credit Suisse Group AG, Switzerland’s second-largest lender, is eliminating about 100 jobs at its U.K. investment-banking unit as it presses ahead with cost-cutting plans, three people with knowledge of the reductions said yesterday. The Zurich-based company is trimming jobs in businesses including equities and advisory, said the people, who asked not to be identified because the moves are confidential.
“By 2015, the City will have shrunk by a third from the 2007 peak,” said Purcell, the London search-firm executive. “This is heavily impacted by external events, especially the euro-zone crisis, but exacerbated by irresponsible and populist politicians imposing onerous regulatory burdens.”
The EU is seeking to cut variable pay as part of politicians’ quest to make lenders more like utilities than private money-making machines. The bloc’s 27 member nations will implement rules on bank capital requirements next year that include caps on bonus size relative to salary.
The limits haven’t been agreed to yet. Othmar Karas, the EU lawmaker sponsoring the bill, has proposed restricting payouts to 100 percent of salary. A compromise drawn up by finance ministers would allow awards of as much as five times fixed pay.
Some bankers in Europe receive bonuses 10 times larger than their base salaries, according to a survey this year by the European Banking Authority. The median of the average ratios across all member states was 139 percent.
The Financial Services Authority, the U.K. industry regulator, told bank CEOs in a letter last month that bonuses must reflect recent scandals, and that clawbacks should be sought from those involved, according to a person with knowledge of the letter’s content who asked not to be identified because the matter was confidential.
U.K. rules adopted in January 2011 limit immediate cash payouts to about 25 percent of the total bonus, and as much as 60 percent of bonuses for risk-takers, such as managers of trading desks, must be deferred. The deferral period for senior executives is at least three years, and half of the non-cash portion must be in shares.
The 2,776 financial firms covered by the U.K. rules, including banks based in London and non-U.K. firms with subsidiaries in the country, can’t offer multiyear guaranteed bonuses. They’re able to pay one-year guarantees only in “exceptional circumstances,” the FSA has said.
Lenders including Credit Suisse and Frankfurt-based Deutsche Bank AG may award as much as 80 percent of compensation for 2012 in deferred payments that vest over multiple years, according to people with knowledge of the banks’ plans. A Credit Suisse spokeswoman declined to comment on the matter, and a Deutsche Bank spokesman said no decision has been made on this year’s bonus composition.
Lloyds Banking Group Plc, 39.2 percent owned by the U.K. government, is considering scrapping annual bonuses for senior bankers in favor of 10-year incentive awards linked to the firm’s share price, a person with knowledge of the discussions said in October. The proposal is one of many being put to investors, and no decisions have been made on whether the bank will adopt it, the person said.
Some regulators are pushing for changes in the structure of compensation for lower-level bankers and traders as well as senior executives, tying more pay to the success of the firm.
“That would make it less easy to get rich quick, irrespective of the quality of business transacted or the compliance culture in their part of the firm,” Bank of England Deputy Governor Paul Tucker told bankers in London in October, according to the text of a speech released by the central bank.
U.S. banks can set their own compensation packages as long as they have repaid the Treasury Department’s Troubled Asset Relief Program, a bailout fund that provided capital injections to firms, including Citigroup Inc. and Bank of America Corp., during the financial crisis. Both banks have repaid TARP.
“European regulation is more troubling to London’s City than U.S. regulation is prone to be troubling for Wall Street,” said PWC’s Gosling.
Still, firms on both sides of the Atlantic are being squeezed by lower revenue and higher capital requirements. JPMorgan, the largest U.S. lender, cut the amount it set aside for compensation in its investment bank to $7 billion in the first nine months of 2012, down 9.4 percent from a year earlier, filings show. Morgan Stanley reduced its figure by 8.5 percent.
Total compensation in investment banking and trading units for U.S.-based employees will fall about 6 percent this year, less than an estimated 10 percent drop for personnel in Europe, according to a report last month by Options Group, an executive-search company in New York that advises banks on compensation.
Pay for top U.S. bank executives declined as well. Goldman Sachs CEO Lloyd C. Blankfein was awarded $12 million for 2011, a 35 percent cut from a year earlier, while Morgan Stanley CEO James Gorman’s total compensation was chopped 25 percent. In April, Vikram Pandit, then-CEO of Citigroup, had his pay, which included a retention package valued at as much as $40 million, rejected by shareholders in a non-binding vote.
Compensation relative to revenue industrywide is expected to fall to about 40 percent from the current level of 50 percent, Sanford C. Bernstein & Co. analysts Brad Hintz and Chirantan Barua wrote in a note to clients Nov. 15.
Barclays Plc’s compensation-to-income ratio, another measure of how much is paid to staff, dropped to 39 percent for the first nine months of 2012 from 46 percent a year earlier, the London-based bank said in October. Pay probably will continue to decline, said CEO Antony Jenkins, who replaced Robert Diamond after the firm paid a record fine in June for manipulating a benchmark interest rate.
“We’ve been clear that we are acknowledging the sentiment of investors and broader society on compensation,” Jenkins said. “We are striking a balance between reducing the compensation ratio over time and protecting the franchise.”
Regulatory investigations including a probe into fees paid in 2008 to Qatar’s sovereign-wealth fund as Barclays tried to avoid a government bailout may hamper Jenkins’s ability to reward dealmakers, pay consultants said. Restructuring charges tied to a cost-cutting plan also may affect what’s left to pay bonuses at Zurich-based UBS AG, the biggest Swiss bank.
FSA rules have led to different compensation structures for top executives receiving equal pay at U.S.-based banks depending on where they work.
Colm Kelleher, the London-based co-head of Morgan Stanley’s investment bank, was awarded $9.25 million for 2011, the same as New York colleagues Paul Taubman, who shared Kelleher’s title, and wealth-management head Greg Fleming, a proxy filing shows. Kelleher got $2.5 million of restricted shares and $4.2 million of deferred cash, which carried a cancellation provision and will vest over a longer period. Taubman and Fleming received $3.4 million of each type of award, according to the filing.
Morgan Stanley structures pay to satisfy regulations while basing total compensation on business performance, according to a person briefed on the firm’s compensation plans.
Michael Sherwood, London-based co-head of Goldman Sachs’s European business, received 36 percent more shares for 2011 pay than President Gary Cohn and Vice Chairmen J. Michael Evans and John S. Weinberg, according to regulatory filings. That premium was to account for a smaller immediate cash bonus allowed under FSA rules, a person briefed on the payments said, asking not to be identified because the information is private.
Spokesmen for U.S.-based banks Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan and Bank of America declined to comment about 2012 compensation, as did those for Lloyds, Barclays, RBS and UBS.
The hardening regulatory stance combined with declines in London pay and higher taxes may lead some bankers to consider relocating to cities with fewer restrictions and where business is expanding. Almost three-quarters of respondents in a survey of London financial-services employees released last week by London-based Astbury Marsden said that most banking jobs will be created in Hong Kong, Singapore and Shanghai.
“The center of gravity continues to move toward China, while confidence in London continues to be chipped away,” said Mark Cameron, Astbury Marsden’s chief operating officer. “The trend does seem to be helped by an overly hawkish attitude taken by politicians and regulators in the U.K.”
Jason Kennedy, CEO of London-based search firm Kennedy Group, said it’s becoming “more and more difficult” for bankers in London to find reasons to stay there.
It’s “an expensive city,” he said, “where bonuses, if you’re lucky enough to receive one, are no longer in cash and are deferred -- in addition to the gloomy outlook with no revival in business for the next 18 months.”
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