Fear of losing staff and concern over placing themselves at a disadvantage to rivals is likely to scupper plans by Britain's top banks to set a formal pact whereby they all agree to curb their 2010 bonus packages.
Last week Standard Chartered dealt the pact a blow by withdrawing from it, and bankers and recruitment advisers said this highlighted the difficulties of getting the various parties involved to reach a deal.
“Any formal pact between banks on bonuses is unlikely - they've got too much to lose and too little to gain,” said Tim Gilbert, who is managing director of Ambition, a recruitment company specialising in London's City finance district.
Bonuses are expected to fall this year due to lower profits at most investment banks. The Centre for Economics & Business Research (CEBR) said in October that the City was set for 7 billion pounds ($10.9 billion) worth of bonuses in 2010, down 4 percent from 2009.
Executives from Barclays, HSBC and Royal Bank of Scotland have been in talks over the bonus pact, but Standard Chartered decided to pull out.
Standard Chartered, which focuses on Asia, Africa and the Middle East, said it had withdrawn because most of its operations take place outside of Britain. It added that it would pay out its bonuses as it saw fit.
HSBC, which like Standard Chartered has a listing in Hong Kong and makes much of its money outside Britain, declined to comment on the situation but headhunters said maintaining a competitive bonus policy was vital for British banks.
“The fact that Standard Chartered has already pulled out of the talks shows that this is not a popular process,” said Ken Brotherston, who is chief executive of financial services headhunting company Kinsey Allen International.
“Reducing pay further will not only tempt highly skilled staff to leave for friendlier shores but it will reduce the amount of cash being pumped into the Treasury coffers by the City,” he added.
One reason why a bonus pact may be hard to achieve is due to the vast contrasts in fortunes between the banks involved.
Royal Bank of Scotland and Lloyds have both been part-nationalised by Britain and are recovering from heavy losses incurred during the credit crisis, so the government can make a strong case to clamp down on their remuneration policies.
However, Barclays, HSBC and Standard Chartered did not use taxpayers' money during the crisis, which would give them grounds to fend off pressure to moderate their bonuses.
Furthermore, the British banks would not want to disadvantage themselves with regards to overseas banks working in London, such as the top Wall Street firms which are under less political pressure over their remuneration policies.
British bankers have consistently warned that clamping down on remuneration could prompt employees to move overseas to rival centres such as Geneva, Singapore or New York, hurting the overall British economy since these workers would no longer be paying income tax in the country.
In October, executives from French banks Credit Agricole and BNP Paribas criticised European Union proposals to clamp down on bonuses, saying the plans could cause Europe's banks to lose top staff to American or Asian rivals.
Geneva-based hedge fund manager Ion-Marc Valahu said any British bank bonus pact could give people an incentive to quit Britain for the more relaxed tax regime of Switzerland.
He added that he did not think any formal pact was likely, and that talks were more likely to revolve around how to come up with a joint public relations plan on the issue.
“They're more likely to get together to discuss how to deal with the public relations side of things, than to discuss how much each other pays. If you know everybody else's price, it makes it easier to poach your rival's staff,” he said.
Others also agreed that the bonus pact talks might just be a public relations exercise, and could mask the fact that many banks may seek to compensate for a drop in bonuses by raising their basic salaries.
“I think a bonus pact is highly unlikely. You should never underestimate the ability of banks to find their way around rules like this,” said Anthony Thomson, chairman of Britain's recently-launched Metro Bank. - Reuters