Dollar-based bonuses shrink with falling currency

2004 investment banking bonuses may not be great. But employees of US banks in Europe face an additional blow: the depreciating dollar.

Since January 2004, the US dollar has depreciated over 5% against the euro, and nearly 7% against the pound. It's bad news for anyone who lives and works in Europe, but has their remuneration calculated in dollars.

Unfortunately, this includes most senior employees at US banks in London. Jon Terry, a compensation and benefits specialist at PricewaterhouseCoopers, says bulge bracket banks typically calculate bonuses in dollars: 'When annual results are reported in dollars, it's logical that the bonus pool should be in dollars in too.'

To shield employees from the shrinking US currency, some banks offer the choice of converting bonuses into European currencies based on an average of exchange rates throughout 2004. JP Morgan and CSFB already offer schemes; others are likely to follow. 'All the banks that don't have these schemes are looking at introducing them,' says a head of division at one US firm.

There's a catch. To benefit from hedging, bankers had to sign up to schemes at the start of the year. After the dollar depreciated nearly 20% against the euro during 2003, it might seem most would have learnt from past experience. But a compensation and benefits specialist at one US bank in London said no more than 30% of staff had opted for the average rate. 'The dollar was fairly weak in January and a lot of people took the view it would improve.'

He said bankers who didn't sign up to employers' schemes may have been making hedging arrangements of their own. However, spread betting companies such as IG Index and Cantor Index claim little evidence of this. 'Bankers will have been cognisant of the fact that the dollar was about to fall out of bed since the middle of the summer,' says David Buik, a spokesperson at Cantor Index, 'But they haven't used spread betting companies to do it.'

If the dollar continues falling, US banks could find their ability to attract top staff eroded. 'Pressure is coming from Deutsche Bank and UBS,' says the compensation and benefits specialist, 'People have started saying they'd be better off at a European house, or at least at one that pays in local currency.'

And pay in anything but dollars is unlikely at US houses. 'We run a global business', says one senior banker at a US house, 'We're not going to pay more to someone in Europe than a comparable producer in the US, just because the dollar moved. There were plenty of years when the dollar was strong and we did nothing about it then.'