LONDON (Reuters) - Investment bankers are still smarting from Europe’s crackdown on bonuses, and not just because this year’s cash rewards were smaller than before — many now risk losing their jobs as a result of these very reforms.
A big hike in salaries over the last 12 months aimed at softening the blow from tougher bonus rules has left banks with an inflexible cost base they now need to slash after revenues shrank during a rough second quarter.
The recent rise in fixed costs is limiting leeway they might have had to do this by adjusting bonus pots, leading to even more pressure to cut jobs.
“Salary rises were a panic move when banks were pressured into ways of limiting bonuses,” said Jason Kennedy, who runs financial recruitment firm Kennedy Associates.
“That’s fine when you have growth. But now they have mammoth costs bases and it’s come back to bite them in the rear.”
A weak three months for trading businesses, battered by sovereign debt woes in Europe, has proved the tipping point for the biggest round of job cuts in investment banking since the height of the financial crisis, after two years of hiring.
From Goldman Sachs in the United States to Credit Suisse and UBS, banks have started cutting, with the two Swiss banks close to shedding thousands more staff.
This time, it’s also senior staff on the advisory desks who are feeling the heat. Their new pay structure, more skewed toward salaries than variable pay, is not helping.
“Banks have usually tinkered around the edges, in the back office, to cut numbers, but the biggest fixed costs are in the front office,” said Mark Cameron, chief operating officer at recruiters Astbury Marsden.
It’s a particular headache for European banks, where regulators brought in stringent rules this year limiting the amount of upfront cash bankers get through bonuses by deferring big chunks of them and paying the bulk in stock.
The result was a huge inflation in salaries. An average managing director might now get 300,000 pounds to 400,000 pounds in base salary as opposed to 175,000 pounds four years ago, at the peak of the market, Kennedy estimated.
At UBS and Credit Suisse, fixed costs could rise to 65 percent and 82 percent of total compensation, respectively, in their investment banks this year from 55 percent and 66 percent in 2009, according to a recent JPMorgan analysis.
An increase in deferred payouts over several years will also add to these pressures over time.
The 2010 bonus round — paid out earlier this year — saw a bigger wave of the dreaded “doughnut” zero bonuses than had been seen for many years, and rewards often only went to star performers.
Another uneven six months of trading in 2011 has further limited the ability to squeeze the pay of underperformers while keeping them in their jobs.
“Now the only way to give someone a bonus is to get rid of someone else,” said Heinz Geyer, managing director at another London recruitment consultancy, Temple Associates.
The willingness to tinker with payouts this year as revenues fizzled out was a shift from the previous status quo, particularly in the boom years of pre-2007, when even the weaker performers could expect a bonus.
For many, this so-called variable pay was only marginally changeable, and was considered as much a fixed part of their total pay as a salary. Multi-year bonus guarantees — now wiped out by new European rules — ensured this.
“The reshift between variable and fixed pay has not made a material difference on what would have been paid anyway,” said Jon Terry, head of compensation at PricewaterhouseCoopers (PwC).
But that looks set to change. Banks are getting close to a point where that transition toward higher salaries did risk impacting how they managed costs, Terry said.
Others warn of widescale restructurings at banks facing a revenue shortfall that they are unable to compensate by cutting costs according to the performance of a particular division.
JPMorgan analysts predicted a restructuring of the fixed income divisions at UBS, Credit Suisse and Morgan Stanley on this basis, also warning “material staff cuts” across second-tier investment banks struggling with high fixed costs.
Editing by Will Waterman