DUBLIN/LONDON 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 (BARC.L) and Deutsche Bank (DBKGn.DE), 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 (SOGN.PA), 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 (BNPP.PA) 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.
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.
(Additional reporting by Mirna Sleiman in Abu Dhabi, Katharina Bart in Zurich and Laura Noonan, Sinead Cruise, Sophie Sassard and Dasha Afansieva in London; Editing by Alexander Smith and Will Waterman)