MORE than 1,000 investment bankers have quit Royal Bank of Scotland to join rival firms for guaranteed cash bonuses and big salary increases, according to banking sources.
The staff exodus, which has cut a swathe through the senior ranks of RBS, has been gathering pace since the government first ordered it to clamp down on bonuses this year.
Although they account for less than 5% of staff in RBS's investment division, the traders and corporate financiers who have been lured away are estimated to have earned it between £600m and £700m last year - almost 8% of its 2008 income.
A stand-off with the government over the payment of bonuses for 2009 threatens to spark a fresh wave of resignations in the new year, according to banking sources.
While many of the bankers would have been likely to leave in any case, the rate of departures is believed to have been accelerated by the storm over bonuses. To stem the tide, the RBS board wants to boost the bonus pool at the investment bank by at least 50%, to about £1.5 billion.
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The board believes that profits generated by the investment bank, which employs 14,000 people, are vital to getting money back for taxpayers - who will soon own 84% of RBS as the state's stake rises.
Although Gordon Brown has indicated that RBS will not be discriminated against in the government's bonus crackdown, Treasury sources have suggested that an increase on last year's bonus pool is unlikely.
Any bonuses paid out by RBS are likely to spark a public outcry in the present economic climate. Many large British companies have enforced pay freezes on staff to help ride out the recession. Investment banks, however, are enjoying a boom in profits due to the loss of competition in the sector after the demise of Lehman Brothers and Bear Stearns, and because of the trillions of pounds in financial stimulus pumped into the system by governments around the world.
Threats by regulators to clamp down on bonuses have encouraged banks to raise salaries instead. Barclays Capital last week told some staff to expect pay to double - and the rise would be backdated to June.
Barclays Capital, Nomura and Société Générale are among the banks offering bumper pay deals to RBS bankers. The poaching raids have targeted all parts of the investment bank, including teams in currencies, commodities, fixed income and credit derivatives. The latest high-profile defector is Fiona Paulus, a senior corporate financier who advised Tata Steel on its takeover of Corus and the Spanish energy giant Iberdrola on its acquisition of Scottish Power.
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The Association of British Insurers (ABI), the City's biggest lobby group, has started to press RBS to match the pay deals on offer elsewhere. Last week the ABI accused the bank of pandering to short-term political objectives by handing the government the right to veto bonuses. Not paying bonuses could damage shareholder value, said the ABI.
RBS's directors have also received legal advice that they may be forced to resign from their posts if they feel the bonus pool is too small to prevent a further brain drain from the bank. The directors have a duty under the companies act to behave in the best interests of all shareholders, not just one of them.