From Wall Street to the City of London, doughnuts are on the menu this bonus season.

While the carbohydrate-packed variety may damage their health, it is the wealth hit from the zero bonus known by the same name that investment bankers increasingly fear.

Anecdotal evidence from banking and headhunting sources suggests a combination of market and regulatory pressure has failed to curb the overall amount paid by investment banks.

But it is effecting a sea change in the way bank employees are compensated.

Aggregate pay for last year is set to top 2009. As banks seek to reward their top staff with a bigger bonus, they are dishing out doughnuts to many more of the rest.

For the first time in 13 years in the City I've been hearing that not only were bonuses low in some areas, but that some people got zero, Andrew Evans from recruiters Morgan McKinley in London, said.

In Europe, where the compensation row is hotter than elsewhere, the most visible impact of stricter bonus rules has been a bumping up of fixed salaries. So although most year-end bonuses are down, average total compensation is similar to 2009.

The other effect of regulation is that more is being paid in shares and more is being deferred. This in turn is having some unforeseen effects on bankers' spending.

The big earners are still big spenders, but now they're bigger negotiators too, according to one real estate agent in New York's exclusive Hamptons region.

They're using that as a little bit of leverage, saying to the sellers 'I'm here and I'm here at a price but because I haven't gotten my anticipated bonus, I can't be increasing my offer. The sky's not the limit,' said Paul Brennan, regional manager for Prudential Douglas Elliman Real Estate.

U.S. VS EUROPE

Imbalances between the regions are starting to show, especially when it comes to hiring, as new regulation in Europe restricts the upfront cash award.

Despite calls for restraint by politicians, the top five U.S. banks paid out $119 billion for 2010, up 4 percent on the year, swelled by an increase in headcount.

In Europe, where compensation details are only just trickling in, Deutsche Bank paid its investment bankers more than $500,000 each on average, up 5 percent on the previous year and topping even Goldman Sachs payouts.

It is no secret that the European headquartered banks currently feel at a competitive disadvantage on this front, said Francisco Paret, co-head of the U.S. investment banking practice at executive search firm Egon Zehnder.

We've seen quite a bit of disparity in compensation structure, particularly when it comes to the proportion of cash versus deferred components.

Deutsche, for example, may have lifted overall pay but it is paying less in bonuses. Senior bankers at the bank receive only 20 percent in cash, compared to about 80 percent at Goldman, according to a headhunting industry source.

The U.S. banks' competitive advantage is likely to be most marked in Asia, where robust capital markets and growth have fueled a war for talent in China, Hong Kong and India.

In key battlegrounds U.S. firms will be able to trump their European rivals with the lure of cash, one head of investment banking for Europe said.

RISKY BUSINESS

European Union lawmakers have brought in a new pay framework they claim is the toughest pay regime in the world, forcing banks to defer up to 60 percent of bonuses over three to five years and pay less than half in cash.

U.S. regulators have also moved to discourage excessive risk-taking. As a result Morgan Stanley said last month it would defer an average of 60 percent of employees' pay, up from 40 percent in 2009.

New U.S. rules banning proprietary trading are also pushing high earning traders to seek lucrative jobs elsewhere, including with hedge funds.

In Europe public anger over bank bonuses remains raw -- last week French President Nicolas Sarkozy knocked down JP Morgan Chief Executive Jamie Dimon's call for an end to bank bashing.

However U.S. concern over pay is fading fast. Big pay rises and bonuses at some of Wall Street's top firms have hardly raised a peep from the press or politicians.

Thomas Montag, Bank of America's investment banking head bagged a $14.3 million bonus, while Goldman boss Lloyd Blankfein took home a $12.6 million bonus and tripled his salary.

Most of those bonuses are in restricted stock awards, and Blankfein's latest bonus is just a fifth of what he got in 2007.

Any repeat of the same trend by Europe's executives, however, would be met with a loud outcry, especially in Britain, where critics are ready to pounce if new chief executives at HSBC and Barclays -- both former investment bankers -- don't show restraint.

Banks in Europe are also leading the way in trying to find new ways of paying out bonuses. Barclays is looking at paying bonds which convert into equity if the bank's capital holds above a certain level.

Despite all the changes, some bankers in the City of London are still splurging, although high end jewellers and other traders in the banking district's shopping centers complain that only fat cats are spending, while others have disappeared.

It's very, very quiet. I mean, do they still get bonuses? said one employee at a French restaurant near the Bank of England, where bottles of Moet & Chandon Cuvee Dom Perignon Rose start at 440 pounds ($709.3).

We're busier than last year, but three years ago it was nice red wines, Dom Perignon... We haven't seen that recently.

($1=.6203 Pound)

(Additional reporting by Steve Slater and Michel Rose in London, Clare Baldwin in New York and David Clarke in Washington, D.C.; Editing by Alexander Smith and Sophie Walker)

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