Phantom shares becoming spookily popular

Investment banks are set to refocus rewards on the performance of individual business units according to one pay consultant.

"Banks are increasingly looking at offering long term remuneration based on divisional performance rather than the top line results of the company," says Jon Terry, head of the reward practice at PricewaterhouseCoopers.

Long term rewards usually take the form of shares in the business as a whole. Going forward, Terry predicts increased use of phantom share schemes, in which business divisions issue non-tradable securities whose notional value varies according to divisional profitability.

Stefan Jentzsch, chief executive of Dresdner Kleinwort, recently announced a new bonus programme refocusing payouts on the profitability of particular business units, instead of individual performance.

Terry says banks may also decide to follow Lehman Brothers in lengthening the vesting period of their stock. IFRS 2, which came into effect in January this year, increases the costs associated with issuing stock to employees, creating an incentive to spread the charge over a longer time period.

Separately, pundits agree that banks are unlikely to be encouraged to pay higher cash bonuses as a result of new EU legislation increasing the cost of employee share plans.

Research by law firm Linklaters suggests around 20% of companies in the EU are contemplating dropping schemes following the introduction of costly new prospective requirements. Unfortunately for anyone hoping to receive a larger cash bonus, banks don't appear to be among them. "Investment banks pay so much of their bonuses in shares that it is unlikely they will stop for this," says Janet Cooper, head of employee incentives at Linklaters. "It's too much a part of their culture."