London is heading into its most rancorous bonus season in years as bankers and brokers are being required to sacrifice rewards to pay for the catastrophic failures of a tiny minority of their colleagues.

Receiving bonuses in weak and falling dollars or in shares that cannot be exchanged for cash for three years will exacerbate the feelings of unfairness, according to City headhunters.

“I think you’ll find tremendous resentment come December, January and February,” Harry Pilkington, a partner in the City headhunter Armstrong, said. “There’ll be some seriously disappointed people.”

Although most City workers in equities, mergers and acquisitions, foreign exchange, commodities and fund management have produced record performances this year, overall bonus pools have been slashed by the credit crunch.

The main problem area is a small corner of the FICC (fixed income, commodities and currencies) divisions of the investment banks - the people responsible for originating and trading asset-backed securities such as collateralised debt obligations (CDOs).

Leveraged finance is the other area of difficulty. Banks that financed or promised to finance loans for company buyouts are sitting on billions of pounds of debt that they cannot shift now without crystallising losses.

These specialist areas probably account for well under 5 per cent of the City workforce, but their activities are predicted to reduce almost everyone’s bonus by up to 20 per cent, or more, regardless of where they work.

Bonus pools could shrink much more severely if the worst fears are realised. Although bonus money is accrued during the course of the year, it can be clawed back again by the bank if the fourth quarter proves especially tough. Some analysts expect banks to be much more conservative in writing down positions at the year-end than they have been so far, amid growing scrutiny from regulators and auditors.

The strained atmosphere will be curdled still further as newly hired employees pick up so-called “guaranteed bonuses” promised at the start of the year, even where their activities have led to devastating losses. Guaranteed bonuses were widespread at the start of the year and used as a key hiring tool to woo talent.

Bonuses are set according to an often subjective system in which the bank’s profits, the worker’s departmental performance and individual contribution can be taken into account. In good years, they make up the vast bulk of total rewards. Base pay even for the City’s most bankable rainmakers and rocket scientists tends to be a relatively modest £100,000 to £300,000. It is the bonus that ratchets up pay to £1 million or more for thousands.

Goldman Sachs, with its November 24 financial year-end, is one of the earliest banks to report and to set bonuses, last year handing a record £8.3 billion in pay and bonuses to its 26,000 employees – an average of £319,000. American banks, which dominate the City, set and pay bonuses in dollars. The US currency has declined against sterling by 10 per cent in the past year.

According to Armstrong, another big feature of the coming bonus round is for banks to pay a greater proportion in shares and options rather than in cash. In some cases the shares vest only after three years and are forgone if the employee leaves in the meantime. UBS, the Swiss banking group, apparently has told senior bankers that it plans to cap cash bonuses at $750,000. Bonuses larger than this will be paid in UBS shares.

In its annual report into remuneration, Armstrong said that the differentiation between winners and losers would be greater this year, with a few stars gaining bonus increases of 10 per cent, while “in some businesses there will be no bonus at all”.

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