* Compensation drops 30 pct in 2011
* Trend towards ending short-term bonus culture
* Mid-tier banks see chance to poach staff
By Paritosh Bansal and Alexander Smith
DAVOS, Switzerland, Jan 28 Budding bankers
expecting the bumper bonuses of years gone by will have to think
again, with only the top performers likely to be paid top
Business leaders and bankers at the annual Davos forum were
largely dismissive of attempts to cap or restrict compensation
in the financial services industry through regulation.
But they said a combination of public anger, tighter
scrutiny from watchdogs, tougher performance measures and a
structural fall in profitability in banking in the post-crisis
world would curb the excesses of the past.
"Compared to four years ago its night and day, partially
because the regulators are insisting on it...and partly because
the supervisory board of banks have said we have got to balance
the reward of our senior team with the reward of our long-term
shareholders. And part of it is the business model has changed,"
a senior investment banker at a major Wall Street firm said.
Part nationalized Royal Bank of Scotland, for
example, said on Saturday that Chairman Philip Hampton would not
pick up a share-based bonus, amid a backdrop of public anger
over a £1 million ($1.6 million) stock bonus for its chief
Compensation consultants estimate bonuses for 2011 fell by
about 30 percent in 2011, with payouts dropping across major
banks such as Goldman Sachs and Morgan Stanley.
Year-end bonuses at Barclays Plc's investment bank
are expected to be down about 30 percent this year, on average,
a source familiar with the matter said on Thursday.
"Of course bonuses are falling, so is profitability," a
senior European banker told Reuters on the sidelines of the
conference on Saturday, following a meeting on the future of
financial services involving top bankers and regulators.
Several business leaders, speaking candidly during closed
meetings, pointed to growing social inequality and said there
was a need for more effective tax collection from the best paid.
And while critical of regulatory efforts to cap executive
remuneration, some blamed overly generous compensation packages
on a lack of shareholder engagement in the issue.
"It should be up to the boards, not the regulators. Where
are the shareholders of these banks?" the head of one investment
bank told Reuters. Like others who spoke about the issue, he
declined to be named.
A speaker on a panel on compensation at the World Economic
Forum meeting in the Swiss Alps said: "Institutional investors
are not that interested because the amount of money that is
involved is totally immaterial."
When asked for a show of hands on whether executive
compensation should be regulated, nobody in the audience of
nearly 100 people raised their hand.
The investment banking head said part of the problem was
that many bankers had come to believe that they alone were
responsible for the profits generated in their business, rather
than the role which they fulfilled.
"It's the seat, not the individual. I resent some
30-something smart Alec being paid $3 million," he said.
For one hedge fund manager, the answer is for bankers'
bonuses to be deferred for three years. This would allow the
effects of the individual's actions to be measured properly over
the course of an economic cycle.
So-called deferrals as a component of the compensation mix
for people working in the financial services industry already is
increasing, Gary Parr, vice chairman of investment banking group
Lazard Ltd, told Reuters.
Parr said mechanisms to recoup bonuses from bankers if their
bets or advice turned sour further down the road were sensible.
"Clawbacks are a rational part of the compensation structure
for companies that have big risk portfolios," he said.
One regulatory official said a combination of limiting the
cash component of bonuses and imposing a deferral were two ways
of weaning banks off a short-term bonus culture. But the rules
on remuneration needed to be radically simplified, he added.
PAY FOR PERFORMANCE
Howard Lutnick, chief executive of Cantor Fitzgerald LP and
BGC Partners Inc, said cutbacks at bigger banks
provided an opportunity for mid-tier investment banks like his
to hire talented individuals. Lutnick said he planned to hire up
to 500 people this year.
"If I have a salesman who makes a sale on a very
sophisticated product (and) you don't pay (him) his fair share
he won't make the sale," Lutnick said, adding that this level
had historically been around 50 percent.
Lutnick said that 2012 would not be representative of a "new
reality", adding that once markets improved, compensation to
bank staff would bounce back.
Other bankers said the change was likely deeper and more
permanent than similar periods before.
"In a world where return on equity is more difficult because
you have higher capital requirements and lending produces fewer
returns because you have lower interest rates, compensation has
to follow," the U.S. investment banker said.
"Now, I do believe that for the bankers, this is not an easy
transition for them," the banker said. "But I am convinced the
companies understand this. Now they just have to build it into
their institutional culture."