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European bank bonuses face 20% cut

European investment banks, including UBS, are set to cut their bonus pools in the coming weeks by 20%.

Story highlights

  • European investment banks to cut their bonus pools in coming weeks by 20%
  • Cuts partly driven by headcount reductions to scale back investment banking
  • Cuts also made to allocate more returns to investors, improve banks' reputations

European investment banks are set to cut their bonus pools in the coming weeks by 20 per cent in a move that will exacerbate the pay gap with their US rivals.

Consultants and bankers estimate that banks including Barclays, Credit Suisse and UBS will reduce overall group bonus levels for 2012 by up to 15 per cent but agree that the cuts will be nearer one-fifth in their investment banking arms.

"This is partly driven by headcount reductions as banks scale back investment banking activity," said Tom Gosling, head of PwC's reward practice. "But also bank boards in Europe are making a concerted effort to allocate a larger share of returns to investors and to reduce bonuses in response to the reputational issues."

But analysts said banks were walking a tightrope as they were torn between often clashing demands of investors, regulators and employees.

Mark Cameron, chief operating officer at recruitment firm Astbury Marsden, said: "Some middle managers expect higher bonuses given that performance at most banks has improved. But that conflicts with what boards will have to do."

Deutsche Bank this week underscored this balancing act when the bank said it had reduced its 2012 bonus pool by 11 per cent to €3.2bn.

    But to reduce the burden on future profits and in a concession to staff, the bank increased the cap on immediate payouts by half to €300,000, although it lowered deferred payouts. And its compensation ratio -- a measure closely watched by investors that contrasts overall pay with revenues -- increased slightly from 39.5 per cent to 40.1 per cent. This is higher than its 35 per cent target and highlights how revenues remained flat while deferred bonuses weighed on costs.

    By contrast, a sharp revenue increase allowed US rival Goldman Sachs to increase average pay and still bring down its ratio by more than 4 percentage points to 37.9 per cent.

    Analysts say UBS and Credit Suisse in particular will struggle to pay less than 50 per cent of their group-wide revenues to staff as expected income slows. In the first nine months, the ratio already stood at 53 and 50 per cent respectively.

    "European banks face a dilemma -- their regulators, investors, and politicians are putting them under more pressure to reduce pay than US firms are facing. Yet in a global industry they are competing for the same talent and so can't let the pay gap get too wide," Mr Gosling said.

    But with the industry slashing tens of thousands of jobs, recruitment experts said there is much less willingness to retain talent at any price.

    Some banks are even starting to look at base salaries, which in the City of London on average rose 1.9 per cent last year, according to Astbury Marsden.

    "We will see further, but more modest, cuts in bankers' pay this year. In the mid-management level we will also see base salaries coming under pressure," Mr Cameron said.

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