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The battle over bank bonuses continues as Morgan Stanley (NYSE:MS) made plans to change their current bonus payment plans in response to government actions in the United Kingdom.  The Wall Street Journal reported that Morgan Stanley plans to reduce its bonus payments to employees worldwide in response to a hotly contested new tax on bonuses paid by banks in the UK.

In a response to public outcry and seeing an opportunity to boost dwindling tax coffers, the Labour Party and Prime Minister Gordon Brown announced last month that the government will impose a tax on bonuses paid by banking firms to employees.  The tax is a 50% one-time tax on bonuses greater than GBP 25,000 (about $40,000) however it will be the banks responsibility, not employees’ to pay.  Now that the financial burden sits squarely on their shoulders, banks are unsurprisingly rethinking their bonus payment policies.

Morgan Stanley’s co-president of the bank’s institutional securities business, Colm Kelleher, stated on a Wednesday conference call that the bank “considered the impact of the UK bonus tax on 2009 compensation levels and since the legislation has not been finalized, we see this largely as a 2010 event.”  He further noted that the intention of the company was to decrease bonus payments to employees globally to compensate for the increased cost in the UK.  “The tax will be shared significantly by employees globally” Kelleher stated.

Under the new law, banks will have until August 31, 2010 to pay the tax, and this has lead to numerous banks either changing their bonus payment policy or delaying the timing of bonus payments in the UK in order to decide how to deal with the new situation.  Other banks with a presence in London – Goldman Sachs Group Inc., Barclays PLC, and Deutsche Bank AG are still undecided as to how to handle the new tax.  Earlier this week, Credit Suisse announced it would lower its global bonus pool by 5% to account for the additional taxes due on bonuses paid to UK employees.

Speculation has been that banks will take either absorb the additional cost of the UK Tax and keep the bonus payment consistent with past amounts, or decrease the amount available in the  bonus pool (as Morgan Stanley has done) for global employees.  The strategy of decreasing the amount available in the global bonus pool has lead to speculation that it could lead to rifts within the firm globally.  Time will tell if this strategy actually causes divisiveness within these companies and still allows them to “remain competitive” in their search the talented employees.

It also remains to be seen how banks will react to the Obama Administration proposal to tax banks annually based on total assets on their balance sheet.  This is an ongoing development, and banks reactions to the UK tax could indicate what their reactions will be to a different type of tax in the US.