Bullish bankers struggle to adjust to bonus cutbacks

LONDON/HONG KONG/NEW YORK Thu Nov 22, 2012 9:00pm IST

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LONDON/HONG KONG/NEW YORK (Reuters) - Self-confidence and betting on long odds are part of their DNA and so, while expecting the financial industry to slash bonuses this year, many bankers think it will not happen to them.

They're in for a shock.

After a year of scandals, job cuts and shaky markets, senior managers and consultants contacted by Reuters warn bonus pools at top banks could shrink by up to 30 percent from last year.

And that's not to mention the pressure from regulators for pay restraint and, in Europe at least, the risk of a backlash from politicians and the public if an industry which many blame for a new era of austerity were to reward itself generously.

The result will be more zero bonuses, dubbed "doughnuts", than ever before as banks become more selective at separating revenue-makers from the merely mediocre.

Yet, while luxury goods companies and high-end clubs and restaurants are bracing for a drop in big spenders, the bonus culture is so ingrained in the glass towers of global finance that many bankers are still pinning their hopes on a big payout.

"It's going to be a rubbish year. But everyone secretly does hope - or think - they might be OK," said one London investment banker, speaking on condition of anonymity.

More than 80 percent of workers in the City of London finance district expect a bonus for 2012, with almost half saying it will likely be higher than last year, a survey by eFinancialCareers showed in October.

Its survey for Wall Street yielded similar results.

Goldman Sachs (GS.N) hasn't helped to curb expectations by setting aside 10 percent more money for compensation in the nine months to September than in a very strained 2011.

"Bonuses are going to be worse than people assume," said the head of a financial practice at a top U.S. headhunter.

The total amount put aside for pay and bonuses so far this year by eight top international investment banks, including JPMorgan (JPM.N) and Deutsche Bank (DBKGn.DE), is already down 7 percent on average from 2011 levels and has fallen further than revenues, third quarter results showed.

A new group of chief executives is also likely to lead from the front. Barclays' (BARC.L) boss Antony Jenkins, who has called for a change in culture at banks, will be keen to avoid the headlines attracted by his predecessor Bob Diamond's 17-million-pound ($27 million) pay package last year.

Deutsche Bank co-CEO Anshu Jain, who earned almost 10 million euros ($13 million) in total pay in 2011 when he was the investment bank boss, is also likely to take home less as he spearheads a move to cut pay across the firm.

SHARING THE PAIN

In an industry which has unveiled plans for close to 160,000 layoffs since last year, just holding down a job is an achievement.

But for those bankers still in work, the years since the 2008 financial market crisis have not been all bad.

Base pay has doubled for some compared to pre-2008 levels, to make up for a drop in the cash bankers get in their bonuses. These are now handed out mostly in shares that are deferred for several years to appease regulators as well as shareholders.

Still, it is difficult for bankers to forget the boom years when bonuses could easily surpass ten times their base salaries. Many had come to expect or even rely on the year-end payment, which in the run-up to 2008 was often viewed as a given.

Bonuses - usually paid out between January and March, after payouts are finalized at year-end - are also still seen as a measure of who is on their way up or on their way out.

"Some people would use it to finance their children through public school and university, or to top up their pension," said Julian Lewry, a former banker at Rabobank and ABN Amro who left the industry in 2006 and now runs a music business.

"You always expected the bonuses to continue rising, thinking 'the more I'm in an organization, the more I'm appreciated' ... Psychologically, I would probably still want to see something (nowadays), even a modest bonus," he said.

The pain is unlikely to be spread evenly across regions.

U.S. pay consultants Johnson Associates said in August it saw a moderate rise in bonuses for 2012, with workers in asset and wealth management and retail banking the main beneficiaries.

In Asia, bankers said global firms competing with local Chinese or Australian banks that are more sheltered from the euro zone debt crisis might have to pay up to retain staff.

Even there, though, managers are trying to lower expectations. "Every time a new report comes out saying bonuses are going down by 'x', I make sure the team sees it," a senior equities banker at a global firm in Hong Kong said.

Different parts of the industry are also likely to have differing fortunes. A strong September in bond trading, for instance, has helped to bump up bank revenues this year.

"Literally, we will be paying those people for a few very good days in September. But so we ought to," said a top executive at an international bank in London.

Mergers and acquisitions bankers, however, who have commanded some of the biggest bonuses in meatier years for holding down top level relationships with companies, will likely do poorly after a slow year for deals.

Those who trade and sell equities - the target of heavy layoffs this year as revenues faltered - can also expect bonuses to drop between 10 and 20 percent, according to estimates from two pay consultants.

The cuts of 2012 are unlikely to be the last either, with pressure on pay continuing as regulators in Europe mull even stricter bonus rules and the industry reshapes.

But big, one-off payouts are not dead yet.

"Bonuses are ingrained in the culture of the people making the decisions as well," said Graham Paul, an employment lawyer with Dundas & Wilson in London.

"That form of remuneration is what built up those banks ... They may have been told it's not the way banks should operate, but many still believe that model works best."

(Additional reporting by Laura Noonan; Editing by Mark Potter)

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