European Banks Face Severe Handicap Recruiting in U.S., Asia

NEW YORK ( TheStreet) -- European banks may soon find it far more difficult to attract and retain talented U.S. executives, as new pay restrictions draw closer.

Under new rules being finalized by the European Banking Authority, top executives at European banks and money management companies will likely be required to limit bonuses to no more than 2 or 2.5 times their base salary, according to Alan Johnson, head of compensation consulting firm Johnson Associates.

"I don't think people are focused enough on what that's really going to mean," Johnson says.

Johnson believes the restrictions will impact all financial services companies more or less equally in Europe. Outside of Europe, however, in big banking centers such as New York and Hong Kong, European banks will find themselves at a severe disadvantage, Johnson argues.

Since Switzerland isn't part of the European Union, institutions like Credit Suisse ( CS)and UBS ( UBS), both of which have sizeable U.S. investment banking operations, won't be affected. The largest U.S. securities players that will take a hit will be Deutsche Bank ( DB)and Barclays ( BCS). Spokesmen from Deutsche Bank and Barclays declined to comment on the latest version of the proposal, which is expected to be announced this week, according to Reuters.

The latest proposal would affect financial sector employees with annual salaries above 500,000 euro, according to Reuters, which cited a report from consulting firm PwC.

The obvious way to address the issue is to raise base pay, and an Independent Compensation Review Panel created by Deutsche Bank recommended in a March 22 report that the German bank do just that. Like other institutions including U.S. competitors Goldman Sachs ( GS), Morgan Stanley ( MS) and Bank of America ( BAC), Deutsche Bank has already reduced bonuses as a percentage of overall compensation.

Still, increasing base pay raises the fixed costs financial companies face, Johnson notes. Such a move potentially makes institutions less attractive to shareholders.

Richard Staite, an analyst based in the U.K. who covers U.S. financial companies for Atlantic Equities, says the issue will put European banks at a disadvantage recruiting outside the U.S., though he thinks they can limit the damage by raising base pay.

As for whether the pay rules will drive away business in Europe, Staite isn't overly concerned for now.

"There's a lot of global banking activities run out of London and potentially some more of these could migrate overseas, but I don't think it's going to be an immediate impact," he says.

At the very least, the pay rules will provide a test of oft-repeated arguments made by financial companies looking to avoid stricter regulation. If the new rules don't make Europe noticeably less competitive, the argument for instituting similar rules in the U.S. may become stronger.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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