DAVOS, Switzerland 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 dollar.
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 executive.
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."
(Alexander Smith, Financial Industry Editor, EMEA; Editing by Jon Boyle)