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European investment banks to reduce bonus pools

Pressure from regulators, investors, and politicians.

The European investment banks are planning to reduce their 2012 bonus pools in the near future by 20 per cent to increase the pay gap with their competitors in the US.

Banking firms like Barclays, Credit Suisse and UBS are estimated to reduce bonus levels by up to 15 per cent for 2012.

Tom Gosling, head of reward practice at PricewaterhouseCoopers (PwC), told the Financial Times: “This is partly driven by headcount reductions as banks scale back investment banking activity. But also bank boards in Europe are making a concerted effort to allocate a larger share of returns to investors and to reduce bonuses in response to the reputational issues.”

Demands of investors, regulators and employees have put the European investment banks under pressure in the recent times.

Mark Cameron, COO at Astbury Marsden, told the Financial Times: “Some middle managers expect higher bonuses given that performance at most banks has improved. But that conflicts with what boards will have to do.”

Deutsche Bank had already reduced its 2012 bonus pool by 11 per cent to €3.2bn. In an effort to reduce the burden on future profits and offer a concession to staff, the bank lowered deferred payouts and increased the cap on immediate payouts to €300,000. Meanwhile, the bank’s compensation ratio grew slightly from 39.5 per cent to 40.1 per cent.

On the other side, a rise in revenue allowed Goldman Sachs to increase average pay and to further bring down its ratio by more than 4 percentage points to 37.9 per cent.

Industry analysts say that UBS and Credit Suisse will struggle to pay less than 50 per cent of their group-wide revenues to staff as expected income slowed. In the first nine months of 2012, the ratio stood at 53 and 50 per cent respectively.

“European banks face a dilemma – their regulators, investors, and politicians are putting them under more pressure to reduce pay than US firms are facing. Yet in a global industry they are competing for the same talent and so can’t let the pay gap get too wide,” Gosling said.

According to Astbury Marsden, some banks are even starting to look at base salaries, which in the City of London on average rose 1.9 per cent last year.

“We will see further, but more modest, cuts in bankers’ pay this year. In the mid-management level we will also see base salaries coming under pressure,” Cameron added.