Written in the Bolly: signs of falling star pay-outs

Champagne corks will be popping in City wine bars in the coming weeks as traders rake in six-figure annual bonuses. But, as Lea Paterson reports, the days of astronomical Christmas pay-outs to star performers could be numbered.

In the run-up to Christmas, City wine bars are traditionally packed to the hilt with traders buying Bollinger with their annual bonuses. These Christmas pay-outs are often as much, and can be more, than employees' annual salaries. But, according to recruitment experts, changing trends in the financial sector, not least the ongoing wave of consolidation, could lead to a big changes in the way bonuses are determined and distributed.

Last year, bonuses were at their highest level since the late 1980s heyday, with some traders becoming millionaires overnight. This year, early indications were that bonuses could be even better. But although some traders will receive six figure pay-outs in the next few weeks, recent turmoil in the Far East means that others will be disappointed.

"Some traders will be seeing their bonuses evaporate along with the Korean won," reckons Roger Steare, chief executive of Jonathan Wren, a City head- hunting agency.

Many leading banks have recently had their fingers burned by the roller- coaster of the Far Eastern stock markets. JP Morgan, the US investment bank, last week warned that the Far Eastern economic crisis would dent annual profits. And UBS, the Swiss banking giant which last week merged with SBC, is reported to have sacked some of its best equity traders last month following heavy trading losses. UBS lost pounds 90m in equity trading in the first half of its financial year. Its losses in recent months are rumoured to be far higher.

But a down-turn in share prices is not the only reason why the days of telephone- digit bonuses could be numbered.

Part of the reason why City pay - both base salaries and bonuses - has escalated is that the financial markets are over-banked. There are simply far too many banks chasing too few talented staff.

According to City head-hunters, staff shortages mean that star traders at the leading investment houses can now command base salaries of pounds 100,000 or so, plus pounds 1m in bonuses. Even traders at second-tier investment houses can expect a base salary of pounds 70,000 plus the same again in annual bonuses.

And the salary "bidding war" is not confined to traders. One recruitment expert commented: "Three years ago, risk analysts were commanding base salaries of pounds 40,000 to pounds 50,000. Now you're looking at double that."

In recent months, however, there has been a wave of mergers in the banking sector. Morgan Stanley, the US bank, announced earlier this year that it was linking up with Dean Witter, a US broker. Salomon Brothers, one of Morgan Stanley's rivals, soon followed suit in a deal with Smith Barney. Both Barclays and NatWest, the UK banks, recently announced they were selling their investment banking businesses to competitors. And just last week, the Union Bank of Switzerland (UBS) and the Swiss Bank Corporation (SBC) announced plans to merge, creating the world's second largest bank with the loss of 3,000 jobs in the City of London alone.

City experts predict that "merger mania" in financial services will continue well into 1998. According to analysts at UBS, in a recent research document, "The Urge to Merge": "Consolidation potential in the banking industry is high. Across Europe there are simply far too many banks."

This consolidation of financial services will reduce the number of bidders for "star" traders. That, in turn, is likely to see current levels of salaries and bonuses being slashed.

"If we see more mergers, this would have negative implications for prospects and salaries. It would become a buyer's market," said Peter Newton, director of the LNI Group, an IT and recruitment consultancy.

Technological changes are another factor that could reduce reliance on, and hence the salaries of, star traders in the years to come. "There will be fewer traders but much more design and support," says Mr Newton of LNI. Other experts believe computers are likely partially to replace traders in the years to come, although the human element is unlikely to be eliminated.

Finally, there is always the chance that investment houses could begin to sit up and take notice of the growing volume of academic studies that say attempts to retain key staff on the basis of pay alone simply do not work. Much more important, the academics say, are relevant training programmes, plenty of opportunities for career progression and good staff management.

As Mr Steare of Jonathan Wren puts it: "If your recruitment and retention policy is based on paying big bucks, there is always someone around paying bigger bucks."

Music to the ears, no doubt, of companies struggling to balance their books. Somewhat less palatable, no doubt, to the traders knocking back the Bolly in London's Square Mile.