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Cash payouts to fall as banks squeeze bonus pots

LONDON -- Many European banks are likely to limit the cash portion of this year's staff bonuses as rocky markets, tighter capital rules and costly scandals take their toll.

Under pressure from politicians, regulators and shareholders, firms are shifting further away from the big upfront handouts of the boom years. Some are expected to opt for a mixture of shares and risky assets — the kind which provoked the global financial crisis in 2008 but in some cases are now regaining value.

Britain's Barclays already capped cash awards at 65,000 pounds (US$105,000) for 2011 payouts, and those types of limits will feature again at several firms, bankers and headhunters said.

In total, 2012 bonuses could be down by as much as 30 percent on 2011 levels, senior managers believe, and the structure of awards is changing as regulators press the banks to clamp down on short-term rewards.

“I'm sure there will be lots of different structures this year with different products, and attempts to cap the cash element. Either way bonuses will be down,” said Stephane Rambosson, managing partner of executive search firm Veni Partners.

In the past year the industry has been caught up in a series of scandals ranging from mis-selling of financial products and a failure to prevent money laundering to the rigging of the Libor interest rate. Regulators have slapped heavy fines on a number of banks and disgruntled customers are following up with civil law suits.

All this is affecting the size and shape of bonuses.

“It's a mix of politicians and regulators wanting (pay) to be down and wanting to see an impact in the media, and also banks' new business models, which will mean that people will get paid less in future,” Rambosson said.

During the crisis, many assets such as sub-prime mortgages became essentially worthless as no one would buy them, fearing that the borrowers would default. But as the crisis eased, some have begun to regain value — albeit from near zero levels — and banks are now using these assets and other risky type of bonds to reward their staff.

Credit Suisse is examining yet more ways to include different types of products as part of its 2012 bonus round, according to two sources familiar with the matter. The bank declined to comment.

As long as four years ago, the Swiss bank paid a group of employees with some of the riskiest assets on its balance sheet as their bonus, and unveiled a similar program for 2011 awards. Know as PAF2, the plan linked bonuses for 5,500 senior bankers to about US$5 billion in illiquid assets that fell in value in the crisis.

This form of payout can be attractive, and the value of some of the assets has grown again, netting paper gains for the bankers — some of whom even jumped at a chance to buy more of the risky assets in the past year.

But this program and others like it, where bankers are paid in shares, make it harder to cash in straight away, with stock rewards for instance deferred for several years, or in some cases such as at HSBC, until certain employees leave or retire.

European Union rules force banks to defer at least 40 percent of a bonus for at least three years, though many firms are now going further than this, partly trying to counter the public outcry over big bonuses after the crisis.

No Excitement this Year

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In this July 25, 2012 file photo, buildings of the HSBC and Barclays banks at the Canary Wharf district are seen from on top of the North Greenwich Arena in London. Many European banks are likely to limit the cash portion of this year's staff bonuses as rocky markets, tighter capital rules and costly scandals take their toll.(AFP)

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