* Automatic cap equal to base salary
* Cap can rise to double base pay if shareholders agree
* Will affect around 5,000 people currently in London
* Banks looking at restructuring pay to get around cap
* Singapore, New York and Middle East seen benefiting
By Carmel Crimmins and Kirstin Ridley
DUBLIN/LONDON, Feb 28 From paying housing costs
to devising "loyalty" payments, banks in Europe are already
looking at ways around a cap on bonuses for their top staff
agreed by European politicians on Thursday.
If unable to circumvent the new rules, then some banks are
likely to review the nuclear option of leaving the region to
ensure they can still attract star traders and rainmakers put
off working in "low income" London, Paris or Frankfurt.
"The banks are notorious for getting their way when times
are tough," said Jason Kennedy, chief executive of financial
recruiters Kennedy Associates.
"What Brussels is doing is putting European banks at a
disadvantage compared to their U.S. rivals, and it is not
something they will tolerate. They will definitely come up with
interesting schemes to bypass this."
Firms have already offered top bankers from the U.S. large
housing allowances in order to persuade them to come to London,
and the curb on bonuses is seen as making it harder still to
attract the best in the industry.
Banks in London have a history of finding ways around
payroll legislation they don't like. In the 1990s some paid part
of their employees' salaries in exotic forms such as gold
bullion, diamonds and fine wine to avoid a form of payroll tax.
Senior bankers warned that the curbs would hurt European
firms with large investment banking units, such as Barclays
and Deutsche Bank, and benefit rivals such
as U.S. bulge-bracket firms and up-and-coming Asian players.
"There is a risk that if the level playing field is not
maintained, the real talents in Europe will move out," Severin
Cabannes, deputy chief executive of France's Societe Generale
, told reporters at a conference in Abu Dhabi.
The rules will apply to all banks - American, Asian, Russian
or European - based in Europe and to units of European banks
located abroad, so whether a BNP Paribas trader is in
Paris or Tokyo, the same cap will apply.
The new rules will not apply to the majority of bank staff,
who on average earn bonuses of up to 30 percent of salary.
They will instead target senior management and so-called
"material risk takers", those who earn bonuses many times their
base salary and are renowned for spending the spoils on upmarket
pied a terres in west London or 1 million pound Aston Martins.
Analysts said the rules would affect around 300 to 500
people in each large bank or around 5,000 people in London, but
that figure will rise significantly, perhaps five to 10 times,
as regulators look to expand the definition of "risk takers".
In anticipation of the cap, banks have spent months
examining ways of changing their pay structures to keep talent
in London, possibly by bumping up allowances and pension
contributions or offering "loyalty" bonuses.
Raising base pay would increase fixed costs and is being
considered by some investment banks, most of which are cutting
back jobs in order to reduce costs, as a last resort.
"Salaries are almost certain to rise substantially, leaving
banks with less flexibility to reduce or claw back bonuses when
needed," said Jon Terry, remuneration partner at PwC.
The cap allows banks to discount future values of shares,
options, bonds or other non-cash payments paid out over a number
of years, but Terry said that was unlikely to raise the
potential bonus much above two and a half times base pay.
With much of the detail yet to be thrashed out - finance
ministers will discuss it on March 5 - bankers are hoping that
EU member states will be given leeway to interpret the rules.
"What we have at the moment is six bullet points on the back
of an envelope," said Terry. "If member states are allowed to
interpret provisions, which is all quite possible, then that
will give greater scope for restructuring compensation to
mitigate the cap."
European lawmakers have argued large performance-related
bonuses are perverse and encourage the sort of risky behaviour
that caused the 2007-09 financial crisis.
Under pressure from regulators and shareholders, banks have
already cut bonus pools, and awards are increasingly deferred
for longer periods, subject to clawbacks and sometimes paid in
ways that mean there is no payout if the bank's fortunes falter.
The new regime, expected to be implemented next year, is a
stinging defeat for Britain as it will hit London, home to over
one third of the global foreign exchange market, hardest.
"The most this measure can hope to achieve is a boost for
Zurich and Singapore and New York at the expense of a struggling
EU," said Boris Johnson, London's outspoken mayor.
Financial services make up nearly 12 percent of the annual
tax take in Britain, and there are fears that around a third of
tax revenues from the financial services sector, or 20 billion
pounds, could be at risk if global banks pull out.
"We regard that figure of 20 billion as fragile simply
because this is going to affect the heads of desks - people who
are running trading," said Chris Cummings, chief executive of
TheCityUK, a body that promotes UK financial services.
"Although that group is quite small, it is a very attractive
group. What we worry about is that that group will head back to
New York, which is, by and large, where they came from."
U.S. AND ASIAN APPEAL
While European banks appear tightly boxed into the
regulations, U.S. and Asian banks can relocate.
Switzerland, a traditional bolt hole for bankers seeking
relief from high taxes, may have lost some of its lustre,
however, with a 20 percent increase in the Swiss franc since the
summer of 2010 hiking the cost of locating there. And Swiss
voters are likely on Sunday to back the world's strictest curbs
on executive pay, according to a recent poll. [ID: nL6N0BKBGI]
While London's buzzing nightlife and glitzy shops are a big
draw for investment bankers, the low taxes and higher salaries
of Asia and the United States are attracting talent,
particularly the next generation of investment bankers who do
not have family commitments tying them to one city.
"It's not clear yet how this will be enforced, but I might
reconsider opportunities in the U.S. within the bank," said one
senior banker at a U.S. investment bank in London.
Singapore was the top location to work, followed by New York,
with London third in a survey of UK investment bankers by
financial services recruitment firm Astbury Marsden last year.
With banker bonuses continuing to fall in the aftermath of
the financial crisis and speculative trading desks closed down,
many traders have fled for hedge funds and private equity firms.
Such funds are not covered by Thursday's deal but will face
separate restrictions on pay under another EU law this year,
further hampering London's position.