BBC business editor Robert Peston on a conundrum for bankers
Britain's biggest banks are talking to each about whether and how they can reduce the total amount of bonuses they would pay in the upcoming bonus season.
I have learned that serious negotiations are taking place on this thorny issue under the umbrella of the British Bankers Association, their trade association.
"We are talking to each other about making some kind of joint statement about bonuses, that would demonstrate that we are reducing the amount we are allocating to remuneration this year" said a senior banker. "It's early days and it's yet not clear whether we will be able to come up with a workable agreement".
Bank bosses know that almost whatever they announce in bonus payments early in the new year will attract criticism from politicians and the public, largely because of the belt tightening that is taking place in the public sector and much of the rest of the economy. However they are trying to limit the criticism.
"What's the most we could achieve?" said a participant in the secret talks. "Well right now the expectation is that banks in the City will pay out around £7bn in bonuses. Maybe we can cut that to £4bn. But although that would be a huge reduction, £4bn is still a big number - and we'll still face attacks".
There are formidable obstacles in the way of any kind of pact on pay.
One great fear of bankers is that they'll be seen to be colluding on a competitive issue, and could therefore be prosecuted by the Office of Fair Trading.
"One of the great paradoxes about all of this is that ministers would love us to agree to cut bonuses, but they're powerless to stop us being prosecuted under competition law," a banker said.
So the bankers in the talks are taking great pains not to be seen to be limiting competition in anything they discuss.
Second they are terrified of reaching an agreement on bonuses that would provide an incentive to top banking talent to relocate to other financial centres, where there are fewer concerns about big pay.
In particular, they are irked that banks on Wall Street are resistant to the idea that they too should agree a policy of mutual disarmament on bonus awards.
"There's no chance that the big US investment banks will follow our example" the banker added. "Which means that business and good people could leave London for New York or elsewhere, if we're seen to be paying less than the market rate".
I disclosed last December that it was opposition from American banks that put the kibosh on short-lived and fairly nebulous talks between international bankers on constraining bonuses that took place a year ago.
The total size of the bonus pool on Wall Street for 2010 performance is expected to be around $20bn (£12.4bn), or about 80 per cent greater than the expected London bonus pool.
Another idea under discussion is that the banks should pool the funds they deploy for community projects and philanthropy, so that they could win some good headlines for allocating hundreds of millions of pounds to good works.
However they're pessimistic this will come to anything, for two reasons.
First, they are reluctant to give up their existing philanthropic projects.
Second, they recognise that if they allocate more money to good causes, they may well be seen to be taking money from their shareholders - including pension funds looking after the savings of millions of people - in order to buy off criticism of huge pay packets going to employees.
"The headlines could actually end up being worse for us, if we did that", another banker said.
You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.