Southpaw: BofA Merrill offers 25% cash as FSA turns up heat on latest London bonus round
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Southpaw: BofA Merrill offers 25% cash as FSA turns up heat on latest London bonus round

Bank of America Merrill Lynch’s star bankers say the firm could be about to renege on pay deals put in place last year to retain staff. The bank appears to have settled on a solution already used by Citi and Royal Bank of Scotland to pay some of its bonuses, writes David Rothnie.

n the latest sign of the chaos engulfing this year’s bonus round, managing directors at Bank of America Merrill Lynch have been told that controversial one-year retention guarantees may now be honoured "in quantum, but not in cash", after pressure from the UK Financial Services Authority.

The issue of guarantees was at the centre of the FSA’s guidelines published last year. It called on multi-year guarantees to be scrapped, but did not seek to ban single-year agreements.

Single-year guarantees became an important feature of compensation last year as firms sought to stave off raids from rivals, with Morgan Stanley, Bank of America Merrill Lynch and UBS among those to offer them.

The Merrill agreements were controversial because the firm had never offered them in the past and they were struck after the bank’s integration into Bank of America led to the departure of dozens of Merrill’s top bankers, many of whom rejected the offer of a guarantee designed to keep them.

Instead, after poaching raids from Deutsche Bank and Credit Suisse in particular, and repeated approaches from Barclays Capital, Merrill’s European management agreed to offer selected key staff one-year cash guarantees.

But last week, the bank’s human resources department told at least one managing director that no pay deals can be guaranteed as originally agreed, citing discussions with the FSA. Bankers were steeling themselves for legal action, in what would be a straightforward case. As one lawyer put it, "This is contract law and the FSA cannot interfere."

The FSA, however, says it is not interfering in the one year deals, leading one banker affected to raise the dark prospect that BofA may be using the FSA a smokescreen to tweak the arrangements. However, it is not clear whether the FSA has any authority to persuade banks to change the stock-cash mix of these payments without breaching contract law.

The bank was lambasted a year ago for agreeing bumper payments earlier than usual to ensure Merrill’s bankers got their cash before the merger closed with Bank of America.

Satisfying the FSA

The issue is made more complicated by the fact that while the FSA says it will not interfere in single-year deals, it deems any multi-year deals "inappropriate" and it expects banks that have them in place to amend or scrap them.

The FSA has told firms that they cannot announce their bonuses until the regulator is satisfied that they comply with the guidelines on pay they agreed to adhere to last November. In broad terms, this hit people in named positions of responsibility, those earning in excess of £1m a year and a new category of bankers who earn £500,000 but whose bonus may be double their basic pay.

Those banks that have announced bonuses — JPMorgan, Citigroup, Credit Suisse and Goldman Sachs — have found ways of satisfying the FSA’s criteria, but others are still in discussions or, in the case of European banks, not due to pay bonuses until next month.

Recruiting the rainmakers

The delays are bad news for banks like Bank of America, which has aggressive recruitment plans in place to hire up to a dozen rainmakers to replenish its deal-making ranks after last year’s exodus.

"How can we go out and hire people if we don’t know how much we can pay them?" asked one managing director at the firm. Given that head-hunters are predicting a bumper year in recruitment as firms hurt most by the crisis come bouncing back with big-name hires, the uncertainty is damaging.

Bank of America Merrill Lynch is likely to assuage any fears by adopting a structure already used by Citigroup and Royal Bank of Scotland in which staff are paid a portion of their bonus in equity that is immediately redeemable.

One person said the bank is looking to pay 25% of bonuses in cash, 40% in stock that will vest over three to five years and 35% in these new units that can be vested immediately. This satisfies regulators and politicians because it is not a cash payment, but assuages the fears of bankers because it can be turned into cash almost immediately. Such payments may also be exempt from the UK’s one-off bonus tax.

Retention guarantees — whether for one or three years — are offered on the basis of confidentiality so it is almost impossible to say how many people are affected. Some rivals have taken a swipe at Barclays Capital, which has been heavily recruiting investment bankers.

Executives at Merrill Lynch and Morgan Stanley say the firm’s model depended on being able to offer guarantees, basing that claim on conversations with staff that BarCap tried to hire. Those staff might be exaggerating offers to their current employers as a bargaining ploy and BarCap denies offering multi-year deals. The bank’s president, Bob Diamond, however, admitted at the bank’s interim results last year that he knew of one or two cases in which multi-year deals were in place.

Reports last week suggested BarCap had already decided to cut its bonus pool by a third but an internal note to staff this week from the firm’s chief executive John Varley insisted pay would be decided "as usual" by the bank’s remuneration committee and announced next month. "We are committed to comply with the FSA’s guidelines," Varley added.

Meanwhile, Deutsche Bank has become the latest bank to increase basic salaries for its staff in an attempt to retain control over pay.

Time to get creative

The awarding of instantly cashable stock or debt units is just the start of banks being creative over pay. Remuneration is the tool they use to differentiate themselves from rivals in an industry whose raison d’être is based on recruiting the brightest and the best. One banker suggested that some firms may move to a commission-based model for their top investment bankers, which would incur a smaller tax liability and would not constitute a bonus in a traditional sense. For the moment, banks simply want to reach agreement on pay and move on.

"Competition is back," said one banker. And intervention is here to stay.

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