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bengigi:

All this will do is make the banks increase the base salaries, which means they will be in even more shit 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, (i) is certainly a good lever for performance, but (ii) is far more powerful when it comes to taking care of shareholders, which banks are (perhaps begrudgingly) prioritizing to a greater extent. In a bad year, cutting the bonus pool both (a) is effective in tightening margins, and (b) plays to the PR concerns of shareholders, in effect "delivering a [metaphorical] head" to them, 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 "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 under-performance and simultaneously cleaning up the banks' balance sheets.

All of this connects to the bonus cap 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 is the form of comp MOST in the interests of employees; 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 the 40% 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. The firms just don't have the 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, and markets being what they are, 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. Will this be the end of DB, Barclays, et al in NYC? (In addition to the Swiss, that is.)

Time will tell, I suppose.

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/