All this will do is make the banks increase the base salaries, which means they will be in even more sh*t when things go bad...
Really though?
From the bank's perspective, a comp scheme emphasizing bonus over base salary has a number of advantages. Most obvious is (i) incentivizing performance, of course. But another, of which we've seen quite a bit in recent years, is (ii) externalizing some of the cost of a bad year.
Benefit (i) is what we probably think of first when we consider "bonuses," in part because it is aligned with a meritocratic pay-for-performance regime - as hungry, driven rainmakers (and would-be/aspiring rainmakers), this is our worldview. But from the bank's perspective, while (i) is certainly a good lever for performance, (ii) is far more powerful when it comes to taking care of shareholders, which banks are (perhaps begrudgingly) prioritizing to a greater extent these days. In a bad year, cutting the bonus pool both (a) helps tighten margins margins, and (b) plays to the PR concerns of shareholders, in effect "delivering a [metaphorical] head," enabling management to portray themselves as taking decisive action.
To illustrate, take a look at UBS' and CS' newly-announced bonus plans (Note 1). UBS is paying bonuses in the form of "bail-in" fixed income instruments, which go to zero if certain capital ratio conditions are triggered before their five-year maturity. CS is paying its bonuses in securities linked to certain assets with high capital requirements. In both cases, the banks are passing unwanted risk on to bankers, effectively making employees liable for firm-wide underperformance (or even just an economic downturn) while simultaneously cleaning up the banks' balance sheets.
All of this connects to the bonus cap under discussion in that banks, more than ever, are finding ways to make bonuses work for them. In a PR environment where populist opinion is (rightly or wrongly) quite negative of bankers, particularly in Europe, do you really think they could get away with bumping up base pay? Salary, as a form of comp, is MOST in the interests of employees; meanwhile, banks have been increasingly pushing camp packages AWAY from bankers' interests. Heck, UBS is paying 40% of its bankers ZERO bonus this year, and that's of the lucky few who will remain AFTER the next round of layoffs (Note 2).
Even if you allow for UBS being the most extreme case, none of this bodes well. Firms just don't have bankers' backs anymore. Maybe there will be some kind of marginal increase in base pay, if only because bankers will quit otherwise, but at best this is a partial offset.
Now, long term, this may truly be an intolerable arrangement, and if so it will cost banks in the quality of their staff. Markets being markets, eventually things will even out in one way or another. Maybe independent non-bank advisory firms will grow market share, or maybe European regulators will be forced to come to their senses. But as it stands now, in the short- and intermediate-term, I am pretty pessimistic on the outlook for European bankers.
But wanna know what's really scary? Apparently the draft regulations as they stand now apply not just to banks' European operations, but also to European banks' operations abroad. In such a scenario, I can't see how foreign banks would be able to compete for top bankers here in the States. Will this be the end of DB, Barclays, et al in NYC? (In addition to the Swiss, that is.)
Um can't this be circumvented by moving headquarters out of Europe? Or am I missing something here?
I mean theoretically yes, but then they lose TBTF funding advantage, and keep in mind they have, to put it delicately, an adversarial shareholder base. Even if management moves to re-domicile, they may very well be blocked from doing so.
I think the fact that we haven't seen a wave of re-domiciling in anticipation of incoming European capital requirements is indication enough that this comp issue isn't sufficient motivation for such a move.
Note 1: http://dealbreaker.com/2013/02/credit-suisse-and-ubs-put-little-pieces-…
Note 2: http://dealbreaker.com/2013/02/bonuslayoffs-watch-13-ubs/
UBS, i cant imagine a better bank to work for
They'd lose a TBTF funding advantage if they left Europe? I don't understand. If they moved to the US, they'd get that same advantage...
They intend to have it apply to hedge funds and asset management firms as well. Their whole reasoning behind this is comically flawed.
To get around this, banks will just vastly increase the "base salary" of bankers/traders, put it into escrow accounts, and at the end of the year transfer a certain percentage of that amount (depending on performance) into the employee's normal bank account.
Incentive always finds a way.
I don't think it's that simple. Lets say DB buys a PO box in Delaware and decides its an American company. And then two years later, it needs a bailout. Do you really think Congress is going to oblige? Maybe they eventualy will, but it's certainly less clear cut than a cut-and-dry American bank. This issue along spawns countless scenarios to consider, and is one of myriad factors which work into TBTF funding discounts.
In addition, I didn't talk much before about nationalist concerns, but they're important. Many of these banks will still only promote citizens of their home country into upper management. There are strong links with their respective national governments. A large bloc of their shareholders are national citizens. End result, there are myriad forces keeping these firms in place, and as I mentioned before, capital controls are a bigger incentive to move than comp will ever be. If they didn't relocate to dodge that, they aren't going to do it now.
I've seen ideas like that floating around. My concern is how do you account for an escrow account (i.e., does cash come off B/S? You prob get a prepaid comp asset, no?), and particularly to whom it accrues interest. This could be more expensive for the payer, since its tied up for so long.
This sucks considering I'm a freshman graduating in April 2017.
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