A survey of nine large banks found that European front office headcount was currently between 325 and 375, having been as high as 900-1,200 as recently as 18 months or two years ago.

"It is still dropping," said Aidan Kennedy, a partner at Armstrong. "It could go as low as 250 in some cases."

The survey defined investment banking as mergers and acquisitions, industry groups and corporate finance, sometimes also including equity and debt capital markets depending on the bank.

As recently as six months ago, banks had regarded 400 as an appropriate headcount, the survey said.

Equity research departments would be culled more drastically, Kennedy said. But there would be little cutting in equity capital markets as the banks had already slimmed down enough. ‘Some teams have fallen from 100 to between 20 and 40,’ said Kennedy.

Clients were becoming concerned about the cuts. "If you’ve seen your relationship manager change twice in nine months, you’re not sure what to think," he said.

Across most sectors bonuses at investment banks in Europe this year will be down by an average of 30%-50% compared to last time, with between 10% and 20% of staff at some banks receiving nothing at all, the survey said.

Following a similar drop in bonus between 2000 and 2001, that could leave someone who had a bonus of $1m two years ago looking at a $250,000 bonus now.

But top performers would be well rewarded. "There will be a strong bias in favour of the best," said Kennedy. "Their bonuses will typically be flat or down by no more than 20%."

The criteria for allocating bonuses have shifted, the report added. This year they will focus on which staff will be needed next year, rather than on their performance over 2002.

Staff with good client relationships were in a strong position as the banks realised they could not afford to lose them.

Some areas were performing relatively strongly. The talent pool remained thin in equity derivatives and average bonuses were likely to be flat or just 10% down this year. Some junior staff might receive a 10% increase in their bonus.

Other healthy areas included credit derivatives and interest rate products, where bonuses would be flat or 20% down. Hiring would continue in these areas and in corporate debt capital markets in 2003.

Among those who could expect the largest bonuses were managing directors in credit derivatives (up to $2.2m), derivatives marketing ($2.8m) and equity derivatives ($3.5m).

Top rated equity analysts would be paid up to $2.2m at managing director level and $400,000 at vice president level.

Kennedy said the prospects of lower bonuses for most people was prompting many to join boutiques or set up their own firms, in areas such as corporate finance advisory work.

He added that large bonuses would return when economic prospects improved.
"In the next bull run we’ll see investment banking picking up again,’ he said.

The banks surveyed were Barclays Capital, BNP Paribas, Citigroup, Credit Suisse First Boston, Deutsche Bank, JP Morgan, Lehman Brothers, Morgan Stanley and Société Générale.